Streetwise Professor

Gary Gensler has long lusted to get his regulatory hooks into cryptocurrency. To do so as head of the SEC, he has to find a way to transform crypto (e.g., Bitcoin, Ether, various tokens) into securities, as defined under laws dating from the 1930s. Although Gensler has stated that crypto regulation is a long way off–presumably because it is no mean feat to jam an innovation of the 2010s into a regulatory framework of the 1930s–he thinks that he may have found a way to get at the second largest crypto, Ether.

Gensler pictured here:

Sorry! Sorry! Understandable mistake! Here’s his actual image:

Ether just switched from a “proof of work” model–the model employed by Bitcoin–to a “proof of stake” model. Gensler recently said that Ether may therefore qualify as a security under the Howey test, established in a 1946 Supreme Court decision–handed down when computers filled large rooms, had no memory, and caused the lights to dim in entire cities when they were powered up.

Per Gensler:

Securities and Exchange Commission Chairman Gary Gensler said Thursday that cryptocurrencies and intermediaries that allow holders to “stake” their coins might pass a key test used by courts to determine whether an asset is a security. Known as the Howey test, it examines whether investors expect to earn a return from the work of third parties. 

“From the coin’s perspective…that’s another indicia that under the Howey test, the investing public is anticipating profits based on the efforts of others,” Mr. Gensler told reporters after a congressional hearing. He said he wasn’t referring to any specific cryptocurrency. 

To call that a stretch is an understatement. A huge one. Because the function of proof of stake is entirely different than the function of a security.

Proof of work and proof of stake are alternative ways of operating an anonymous, trustless crypto currency. As I’ve written in several pieces here and elsewhere, eliminating the need for trusted institutions to guarantee transactions does not come for free. Those tempted to defraud must incur a cost if they do in order to be deterred. A performance bond sacrificed on non-performance or deceit is a common way to do that. Proofs of stake and work both are effectively performance bonds. With proof of work, a “miner” incurs a cost (electricity, computing resources) to get the right to add blocks to the blockchain: if a majority of other miners don’t concur with the proposal, the block is not validated, the proposing miner gets no reward, and sacrifices the expenditure required to make the proposal. Proof of stake is a more traditional sort of bond: you lose your stake if your proposal is rejected.

A security is something totally different, and serves a completely different function. (NB. I favor the “functional model of regulation” proposed by Merton many years ago. Regulation should be based on function, not institution.). The function of a security is to raise capital with a marketable instrument that can be bought and sold by third parties at mutually agreed upon prices.

So with a lot of squinting, you can say that both securities and staking mechanism involve “the efforts of others,” but to effect completely different purposes and functions. The fundamental difference in function/purpose means that even if they have something in common, they are totally different and the regulatory framework for one is totally inappropriate to the regulation of the other.

This illustrates an issue that I often come across in my work on commodities, securities, and antitrust litigation: the common confusion of sufficient and necessary conditions. Arguably profiting from the efforts of others could be a necessary condition to be considered a security. It is not, however, a sufficient condition–as Gensler is essentially advocating.

But what’s logic when there’s a regulatory empire to build, right?

I’m also at a loss to explain how Gensler could think that proof of stake involves the “efforts” (i.e., work) of others, but proof of, you know, work doesn’t.

Gensler’s “logic” would probably even embarrass Sir Bedevere:

“What also floats in water?” “A security!”

Gensler might have more of a leg to stand on when it comes to tokens. But with Bitcoin, Ether, and other similar things, hammering the crypto peg into the securities law hole is idiotic.

But never let logic stand in the way of Gary’s pursuit of his precious:

GiGi is not solely focused on crypto of course. He has many preciouses. This week the SEC released a proposed rule to mandate clearing of many cash Treasury trades.

Clearing of course has always been a mania of Gary’s. His deep affection for me no doubt dates from my extensive writing on his Ahab-like pursuit of clearing mandates in derivatives more than a decade ago. Clearing is Gensler’s hammer, and he sees in every financial problem a nail to be driven.

The problem at issue here is the periodic episodes of large price moves and illiquidity in the Treasury market in recent years, most notably in March 2020 (the subject of a JACF article by me).

Clearing is a mechanism to mitigate counterparty credit risk. There is no evidence, nor reasonable basis to believe, that counterparty credit risk precipitated these episodes, or that these episodes (whatever their cause) raised the risk of a chain reaction via a counterparty credit risk channel in cash Treasuries.

Moreover, as I have said ad nauseum, clearing and the associated margining mechanism is a major potential source of financial instability.

Indeed, as I point out in the JACF article, clearing and margin in Treasury futures and other fixed income securities markets is what threatened to turn the price (and basis) movement sparked by Covid (and policy responses to Covid) into a systemic event that required Fed intervention to prevent.

I note that as I discussed at the time, margining also contributed greatly to the instability surrounding the GameStop fiasco.

Meaning that in the name of promoting financial market stability Gensler and the SEC (the vote on the proposal was unanimous) are in fact expanding the use of the very mechanism that exacerbated the problem they are allegedly addressing.

Like the Bourbons, Gensler has learned nothing, and forgotten nothing. He has not forgotten his misbegotten notions of the consequences of clearing, and hasn’t learned what the real consequences are.

Of course these two issues do not exhaust the catalog of Gensler’s regulatory imperium. Another big one is his climate change reporting initiative. I’ll turn to that another day, but in the meantime definitely check out John Cochrane’s dismantling of that piece of GiGi’s handiwork.

As Gideon John Tucker said famously 156 years ago: “No man’s life, liberty or property are safe while the Legislature is in session.” Nor are they when Gary Gensler heads a regulatory agency.

European politicians are desperate, and desperate politicians thrash around and grab stupid ideas–any idea–that they think will alleviate the source of their desperation.

The cost of energy is extremely high now in Europe, and that is stoking political desperation. The politicians don’t like the price signals that the market is sending, and so they are exploring myriad ways of interfering with the price system. These policies (e.g., price controls) cannot solve the underlying problem: Europe is structurally short energy. Moreover, they will create their own problems, which will result in panicked reactions that will create new problems. Wash, rinse, repeat. The whole thing is doomed to collapse. In tears.

There is no better illustration of the European failure to come to grips with their real problems than some of the recent proposals surrounding LNG. One is to cap the price of imported LNG.

Brilliant! That way you’ll have even less gas, and the marginal value of power will go up! Yay!

Er, the LNG market is a world market. Yes, Europe collectively is large enough to have some monopsony power and thus can reduce price: but one exercises monopsony power by cutting purchases. That is, less gas will flow to Europe. Europeans will consume less electricity, and they will substitute higher cost ways of generating it. The shadow price (the opportunity cost, i.e., the real cost) of electricity and gas will increase, not fall.

Another proposal is in some ways even whackier: to replace the Dutch Title Transfer Facility (TTF) price with the Japan-Korea Marker (JKM) as the benchmark price for gas in Europe. Because the JKM price is lower. Or something:

As a last resort in case of supply disruption in Europe the EU could also explore temporarily pegging the TTF to the JKM Asian benchmark as a dynamic cap. Yet that would require the use of other hubs or mechanisms to allocate gas inside Europe, the commission said in the document on benchmarks for the wholesale gas market. “In this situation, JKM would become the world price for international gas for some time,” the commission said. “The wholesale market would be therefore determined by LNG supply/demand, and not by the EU’s internal bottlenecks. LNG would still be attracted by the fact transport costs are lower to the EU.”

In other words, the EC doesn’t like the basis between the price of pipeline gas in Europe (as measured by the TTF price in the Netherlands) and JKM. So, voilà! Make JKM the benchmark and tie the TTF price to the JKM price.

This begs the question of why the basis is what it is. The basis–the spread–reflects bottlenecks as well as shipping costs. If TTF is at a premium to JKM (which it is) even though shipping costs to Europe are lower, that means that there is some bottleneck to transform LNG on the European coast into gas in a pipeline on the continent. The most likely bottlenecks is gasification capacity. The Europeans are scrambling to get floating LNG gasification facilities operating, but the basis/spread is saying that a lot more capacity is needed.

The EC concedes that TTF is at a premium, and that the premium has increased: ““The price premium between the TTF and Europe’s LNG delivered ex-ship indices has widened significantly bringing up questions about its representativeness as an index for linking the contracts in the whole EU-27.”

It only brings up questions to fools. Non-fools get it.

If by “pegging” the Europeans impose some spread between TTF and JKM (adjusted for shipping cost differentials) that does not reflect these EU bottlenecks and their associated costs, the supply of LNG to Europe will be reduced. The only way to incentivize the flow of gas from overseas into European pipes is to have a price that covers the cost of that transformation. If there are bottlenecks, that transformation is expensive.

Thus, it is utterly delusional to think that a price that does not reflect “the EU’s internal bottlenecks” is a good thing: you want a price that does reflect them. The bottlenecks don’t go away because you don’t let the market price reflect them. If you don’t let the market price reflect them, the gas will go away. (Asia will send its regards, by the way.)

You may not like the message the price sends, but you cannot wish it away. And if you try, the message will be sent in an even more painful way. The Europeans (and the UK) seem hell bent on proving this very basic point the hard way, rather than learning from the hard experience of others dating back millennia.

The invaluable eugyppius has read Klaus Schwab’s latest epistle, so we don’t have to. Thanks! A great public service.

One thing that struck me in reading eugyppius’ review is that Schwab repeatedly says things like this:

A pandemic is a complex adaptive system comprising many different components or pieces of information (as diverse as biology or psychology), whose behaviour is influenced by such variables as the role of companies, economic policies, government intervention, healthcare politics or national governance … The management … of a complex adaptive system requires continuous real-time but ever-changing collaboration between a vast array of disciplines and between different fields within these disciplines. 

and:

[I]n global risk terms, it is with climate change and ecosystem collapse … that the pandemic most easily equates. The three represent, by nature and to varying degrees, existential threats to humankind, and we could argue that COVID-19 has already given us a glimpse, or foretaste, of what a full-fledged climate crisis and ecosystem collapse could entail from an economic perspective … The five main shared attributes are: 1) they are known … systemic risks that propagate very fast in our interconnected world and, in so doing, amplify other risks from different categories; 2) they are non-linear, meaning that beyond a certrain threshold, or tipping point, they can exercise catastrophic effects; 3) the probabilities and distribution of their impacts are very hard, if not impossible, to measure …; 4) they are global in nature and therefore can only be properly addressed in a globally coordinated fashion; and 5) they affect disproportionately already the most vulnerable countries and segments of the population. (p. 133f.)

There are additional examples, but these suffice to demonstrate the category error that is at the root of Schwab’s thinking (if you can call it that): He has a mania for controlling and managing complex, interconnected, nonlinear system, via a global elite. But complex, interconnected, and nonlinear systems (emergent systems) are by their fundamental nature not subject to central control! “The world is really, really complex, in the technical sense of the word, therefore we the anointed need to control it” is the oxymoron to end all oxymorons. (Or the non sequitur of all non sequiturs.)

And for reasons Schwab himself states! I repeat: “the probabilities and distribution of their impacts are very hard, if not impossible, to measure.”

So, genius, how are you supposed to control something where it is impossible to understand the distribution of impacts–or even the probability distributions of impacts? So Schwab apparently grasps the Knowledge Problem, but completely misunderstands its implications. Whereas Schwab believes that it implies the need for greater central control (on a global scale, no less), in fact as Hayek pointed out long ago it implies the utter futility–indeed, the destructiveness–of attempts at such control.

This is the mindset of the Sorcerer’s Apprentice, and the results would be exactly the same.

Schwab is an archetype of what James C. Scott referred to as “high modernism” in his book, Seeing Like a State. The subtitle of Scott’s book couldn’t be more appropriate: “How Certain Schemes to Improve the Human Condition Have Failed.” They failed, Scott shows through numerous examples, precisely because these high modernist schemes (usually predicated on claims of scientific authority) represented attempts to control and manage complex, emergent systems. To control the uncontrollable. Or worse: things that behave badly when you try to control them.

Schwab’s main allies are in the managerial class, indeed, they are at the pinnacle of that class being the CEOs of massive corporations. But an organization–a business–is fundamentally different than an economic and social system, and the methods that work for an organization don’t work for a complex system in which formal organizations are just a part. (This is why, for instance, avatars of high modernist management and engineering, like Herbert Hoover and Jimmy Carter, failed miserably as presidents.)

Hence the category error. Viewing complex systems as things that can be managed, like organizations. They aren’t, and attempts to do so–especially on the grandiose scale envisioned by Schwab and his fellow travelers–are doomed not just to failure, but disaster, as James C. Scott so vividly demonstrates.

While writing the post on European electricity prices, I was wondering about the drivers. How much due to fuel prices? How much due to capacity constraints? Risk premia?

Spreads, specifically spark and dark spreads, are the best way to assess these issues. Spark spreads are the difference between the price of electricity and the cost of natural gas necessary to generate it. And no, dark spreads are not the odds that Europe will shiver in the dark this winter–though I’m sure that you can find a bookie that will quote that for you!: a dark spread is the difference between the price of power and the cost of coal required to generate it. In essence, spark and dark spreads tell you the gross margin of generators, and the value of generation capacity. High spreads indicate that capacity is highly utilized: low spreads that capacity constraints are not a maor issue.

Sparks and darks depend on the efficiency of generators, which can vary. Efficiency is measured by a “heat rate” which is the number of mmBTU necessary to generate a MWh of electricity. Efficiency can be converted into a percentage by dividing the BTU content of electricity (3,412,000).

Electricity is a highly “spatial” commodity, with variations across geographic locations due to the geographic distribution of generation and load, and the transmission system (and the potential for constraints thereon). Moreover, since electricity cannot be stored economically (although hydro does provide an element of storability) forward prices for delivery of power at different dates can differ dramatically.

Looking at sparks and darks in Europe reveals some very interesting patterns. For example, comparing the UK with Germany reveals that German day ahead “clean” sparks (which also adjust for carbon costs) are negative for relatively low efficiency (~45 percent) units, and modestly positive (~€35) for higher efficiency (~50 percent) generators. In contrast, UK day ahead sparks are much higher–around €200.

Another example of “identify the bottleneck.” The driver of high spot power prices in Germany is not limitations on generating capacity–it is the high fuel prices. (Presumably the lower efficiency units are offline in Germany now, as their gross margin is negative.) Conversely, generation capacity limits are evidently much more binding in the UK.

But if you look at forward prices, the story is different. Quarter ahead clean sparks in Germany are around €200, while in the UK they are over €300. Two quarter ahead (the depth of winter) are almost €600 in Germany and a mere €300 or so in the UK. (All figures for 50 percent efficiency units).

These suggests that capacity will be an issue in both countries, but especially Germany. Way to go, Germany! Relying on solar in a country with long nights ain’t looking so good, is it?

The wide sparks also undermine attempts to blame it all on Putin. Yes, high gas prices/gas scarcity courtesy of Vova is contributing to high power prices, but that’s not the entire story. Though to be fair, more gas generating capacity wouldn’t help that much if they become energy limited resources due to a lack of Russian gas.

The high forward prices may also reflect a high risk premium. My academic work from the 2000s showed that there is an “upward bias” in electricity forward prices. That is, forward prices are above–and often substantially above–expected future spot prices. My interpretation was that this reflects “spikeaphobia”: power prices can spike up, but they are supported by a floor. This means that being caught short is much riskier than being long. This creates an imbalance between long hedging (to protect against price spikes) and short hedging (to protect against price declines that are likely to be far smaller than upward spikes). This creates “hedging pressure” on the long side: if speculative capital to absorb this imbalance is constrained, this hedging pressure drives up forward prices relative to expected spot prices.

The imbalance is likely exacerbated by the fact that there are large fuel price spike risks too. Moreover, the price and liquidity risks that speculators absorbing the imbalances must shoulder is likely raising the cost of speculative capital in electricity trading, meaning that there is both a demand pull and cost push driving the risk premium. Thus, I conjecture that some portion–perhaps a hefty portion–of the large spark spreads for German and the UK is risk premium. (Back in the days I started to estimate the risk premium in the US markets in the late-90s, the risk premium was as much as 50 percent of the forward price. That decline substantially over the next decade to about 10 percent for summer peak as the electricity markets became more “financialized.” Financialization, by the way, is usually a pejorative, which drives me nuts. Financialization typically reduces the cost of hedging.).

In the aftermath of the mooting of EU proposals to intervene massively in electricity markets, especially through price controls, forward power prices have plummeted: the above figures are from before the collapse. Price controls would impact both the expected spot price and the risk premium–because they take the spikes out of the price. However, as I noted in my prior post, this is not good news: if prices cannot clear the market, rationing will.

Dark sparks also tell a fascinating story. They are HUGE. The German dark spark for 2 quarters ahead (Jan-Mar) is over €1000, and the UK dark spread is over €600. In other words, it’s good to own a coal plant! By the way, these are clean darks, so they take into account the cost of carbon. Meaning that the market is sending a signal that the value of coal generation–even taking into account carbon–is very high. This no doubt explains why despite massive green and renewable rhetoric in China, the Chinese are building coal capacity hand over fist. It also points out the insanity of European policies to eliminate coal generation. Even if you believe in the dangers of carbon, the way to deal with that is to price it, rather than to dictate generation technology.

To give some perspective, the above figures imply that a 500MW coal plant in Germany was anticipated to produce €870 million in value in 23Q3 (24 hours/day x .80 operating rate x 91 days/quarter x 500 MW x €1000/MW). That’s more than the cost of a plant. Even if you cut that in half to take into account today’s power price collapse, it’s a huge number.

Think about that for a minute.

In sum, spreads tell fascinating stories about what is happening in the European electricity market, and in particular the roles of input prices and capacity constraints and risk premia in driving the historically high prices. But perhaps the most fascinating story they tell is the high price that Europe is paying to kill coal.

European power prices are going hyperbolic, with day ahead prices in swathes of the continent varying between €660 and €750/MWh.

For those who want to play at home–spot the congestion!

Even more remarkably, Cal 2023 power prices are around €1000/MWh in German and France:

That’s for baseload, folks. 24/7/365. Peak Cal 2023 French power is currently at €1425. Ooh la la!

This has of course set of a flurry of policy proposals.

None of these proposals will mitigate the fundamental problem–energy supply is extremely scarce. Most of these proposals will actually exacerbate the underlying scarcity.

Instead, these proposals are all about how to distribute the cost of scarcity. They are fundamentally redistributive in nature.

The proposals include price controls (natch), windfall profits taxes, and nationalization.

Price controls always exacerbate the scarcity and create actual shortages by encouraging consumption and discouraging production. They will necessitate rationing schemes. In electricity, rationing often involves brownouts and blackouts. Planned blackouts, such as no power availability at all for some hours of the day.

WIndfall profits taxes attempt to capture the surplus of inframarginal (i.e., low cost) suppliers, and redistribute that surplus (somehow) to consumers. Redistributing through subsidized prices exacerbates scarcity because it increases demand.

Windfall profits taxes may otherwise have few distorting effects in the short run, given that supply from the inframarginal firms is likely to be highly inelastic (they basically operate at capacity). (Ironically, the scheme to hit Russia by capping the prices it receives on oil is predicated on a belief that supply is highly inelastic.). However, windfall profits taxes have very deleterious long run incentives. They deprive those who invest in production capacity of the value of those investments precisely when they are greatest (which really distorts investment incentives). Even the risk that windfall taxes will be imposed in the future depresses investment today. Meaning that although such taxes may not do too much damage in the present, they increase the likelihood of future scarcity.

The reach of windfall profits taxes is also limited. Many of the rents resulting from the current world energy situation accrue to input suppliers (e.g., owners of LNG liquefaction capacity, coal miners that export to Europe) who are beyond the reach of grasping European hands via windfall profits taxes. (And are the Norwegians going to transfer wealth to Europe by imposing windfall taxes on their gas production and writing a check to Brussels? As if: the Norwegians are already talking about limiting energy exports to Europe.)

Nationalization can be a crude form of windfall profits tax: nationalizing low cost producers basically seizes their surplus. Nationalization can also be a form of subsidization: seize unprofitable firms, or firms that can only survive by charging very high prices, and sell the output below cost. Losses from below cost sales are socialized via taxpayer support of loss-making nationalized enterprises (which creates deadweight costs through taxation present and future).

Nationalization of course generates future operational and investment inefficiencies due to low power incentives, corruption, etc. Moreover, to the extent that nationalized entities subsidize prices, they will encourage overconsumption, and thereby create true shortages and necessitate rationing.

All of these policies aim to mitigate the pain that power consumers incur by shifting the costs to others–and in the forms of subsidies funded by general taxation, the overlap between those who receive the subsidies and those who pay them is pretty large. But even this transforms a very visible cost into a much less visible one, and thus has its own political benefit.

The Germans–at least the Green Party ministers in the government–are advocating a fundamental change in the market mechanism, specifically, eliminating marginal cost pricing:

“The fact that the highest price is always setting the prices for all other energy forms could be changed,” Economy Minister Robert Habeck, who is also the vice chancellor in the ruling coalition in Berlin, said in an interview with Bloomberg.

“We are working hard to find a new market model,” he said, adding that the government must be mindful not to intervene too much. “We need functioning markets and, at the same time, we need to set the right rules so that positions in the market are not abused.”

Marginal cost pricing is a fundamental economic tenet: price equal to marginal cost gives the right incentives to produce and consume. Below marginal cost pricing (the cost of the most expensive resource sets the price) encourages overconsumption. Further, unless marginal units are compensated there will be underproduction. Both of these create inefficiencies, exacerbate scarcity, and can lead to actual shortages and the necessity of rationing.

On a whiteboard you could draw up a pricing mechanism that perfectly price discriminates by paying each resource its marginal cost. This effectively appropriates all of the producer surplus which can be redistributed to favored political constituencies. But this doesn’t cover fixed costs and a return on capital, which discourages future investment.

Further, classroom whiteboard exercises are usually impossible even to approximate in reality. Knowing what marginal cost is for each resource in a complicated system is a major problem, especially when you take transmission into consideration. The likely outcome would be some sort of kludge with roughly average cost pricing combined with some Rube Goldberg scheme to compensate producers. This whole system would involve massive redistribution and all of the politicking and corruption attendant to it.

The real problem the Europeans have is that they want to kill the market messenger. The market is signaling scarcity. The scarcity is real, and acute, but they no likey! And by the nature of energy production–capital intensive, with moderate to long lead times to enhance capacity–the scarcity will continue for some time, with little the Europeans can do about it.

In other words, they can’t fix their real problem (scarcity), which is the harvest of their previous policy follies. So they are left to find redistributive schemes to allocate the costs in a politically satisfactory way. These redistributive schemes–price ceilings, windfall profits taxes, nationalization, fundamental restructuring of the market mechanism–all tend to exacerbate scarcity in both the short and longer runs.

The fact is, when you’re screwed, you’re screwed. And Europe is well and truly screwed. What is going on in policy circles in Europe right now is figuring out who is going to get screwed hardest, and who is going to get screwed not so much. And there will be substantial costs, both in the short but especially the longer term, as whatever Frankenstein “market” emerges from these frantic policy stopgaps will wreak havoc in the future, and will be very hard to put down.

Kamala Harris is an idiot. This statement needs no elucidation. It verges on self-evident truth.

The most recent illustration:

KAMALA HARRIS: "Equity as a concept says recognize that everyone has the same capacity, but in order for them to have equal opportunity to reach that capacity, well, we must pay attention to this issue of equity." pic.twitter.com/iwrdS6C5QJ

— RNC Research (@RNCResearch) August 12, 2022

Note Kamala’s characteristic redundancy and circularity.

But I have to extend my deepest thanks to Kamala. Before reading that, I didn’t know that my failed NBA dreams were the result of hidden structures of oppression. For if we all have the same capacity, I have the same capacity as, say, Michael Jordan. Meaning that systemic oppression has to be–has to be!–the only reason I am not the GOAT.

My only question no is: whom do I sue?

Sarcasm aside, I am genuinely grateful to Kamala because she said the quiet part out loud, and revealed the premise underlying the entire equity agenda. Namely, that “everyone has the same capacity.”

This is a self-evident untruth. Thus, the equity agenda is built on a lie, and all its assertions and conclusions are therefore false. Kamala has generously put the laser designator on the target that we need to destroy in order to eliminate this pernicious doctrine.

Most philosophies and social theories are built on beliefs about human nature. Arguments over Locke and Hobbes, for example, depend crucially on their contrasting assumptions about human nature. You may disagree with the human nature foundations of this philosophy or theory or that, but usually there is at least a kernel of truth and insight in those that have achieved wide acceptance and which have endured.

But that’s not the case with equity, as revealed by Kamala Harris. It is built on an obviously false model of humanity.

Most clever leftists who advocate the equity agenda obfuscate and obscure the underlying assumption. Kamala is a leftist, but a dim one, so she let the cat out of the bag. And for that we can all extend our hearty thanks.

The “Inflation Reduction Act” became Joe Biden’s climate and health care bill.

The narrative pivots are truly amazing to watch.

The deeper you dig into the details, the worse it looks. The supersizing of the IRS is one example. And if you believe that the massive expansion in “enforcement” (representing fully half of the $87 billion in increased expenditure) won’t be directed at schlubs like you, well, you’re a schlub and a sucker. The IRS, like federal law enforcement generally, goes after the easy targets. The people without the resources to defend themselves. And given the rampant politicization of all federal bureaucracies with any enforcement powers, if you are an easy and leveraged target. Get some money, damage the deplorables.

As to the climate aspect, it is a massive boondoggle of subsidies of inefficient technologies. We are constantly told (just read Bloomberg, if you can stomach it) that renewables are becoming so so so efficient. OK. Then why do they need massive subsidies to displace putatively inefficient fossil fuels?

And is there any evidence that our Solons have contemplated the systemic impacts of their intervention? In particular, how encouraging electrification generally, and the supply of electricity with renewables, will affect the reliability and indeed the stability of the grid? Of energy supply generally?

Or as another example, have they thought a nanosecond about the environmental and geopolitical consequences of this intervention into the extremely complex energy supply system? I’ve gone on at length before about the environmentally destructive effects of allegedly “green” policies. In a nutshell: mining ain’t green.

I’ve also discussed the geopolitical aspects, specifically the inevitable conflict over mineral resources vital for batteries and electrification generally. This conflict will be with China in particular, and will occur primarily in Africa and South America.

When I originally raised this issue, I received a lot of pushback. Whatever. Just watch. The Scramble for Africa Part Deux is already underway (with Russia as well as China contending with the US).

This benign summary of US policy towards Sub-Saharan Africa conceals more than it reveals. It acknowledges that Africa has 30 percent of the “critical minerals that power our modern world.” It says “[t]he United States will assist African countries to more transparently [sic] leverage their natural resources, including energy resources and critical minerals, for sustainable development while helping to strengthen supply chains that are diverse, open, and predictable.”

Just how is that supposed to work, exactly, in competition with the Chinese (and Russians) who are all about “assisting” rather non-transparently (through bribery and force) African nations exploit their natural resources in ways that are anything but “sustainable,” “diverse,” or “open”? (They are altogether predictable though.)

The logic is inexorable. Western nations hell-bent on the “energy transition” will increase dramatically the demand for resources in poorly governed or ungoverned regions of the world. Given that property rights in these regions are weak (and often non-existent) the competition will not be mediated through markets, but through force and fraud.

Meaning that the unintended–but inevitable–consequence of the compelled transformation of energy supply will be conflict in wretchedly poor areas that will make 19th century British and French struggles in Africa look like child’s play.

Put differently, virtue signaling policies in the West will create massive rents in countries with weak institutions that are especially prone to the most vicious forms of rent seeking. That will work out swell!

Case in point: the looming battle in the Lithium Triangle:

Similar setbacks are occurring around the so-called Lithium Triangle, which overlaps parts of Chile, Bolivia and Argentina. Production has suffered at the hands of leftist governments angling for greater control over the mineral and a bigger share of profits, as well as from environmental concerns and greater activism by local Andean communities who fear being left out while outsiders get rich.

And it’s not just lithium. It’s copper too. And rare earths, and nickel, and on and on.

In other words, we are about to witness the “resource curse” on meth. Massive rent seeking struggles in weak polities, all due to the whims of western elites in the thrall of a theory–and divorced from reality.

And for what? Even if the theory is correct, the impact of things like the “Inflation Reduction Act” on global climate will be virtually immeasurable, in the 100ths of a degree F at most, and perhaps in the 10000s of a degree.

In other words, the intended consequences of this act, and others like it, will be virtually nonexistent, while the unintended consequences will be dire. “Died of a theory” will be literally true–especially for those unfortunate enough to be living atop the resources the demand for which will be stimulated greatly by western elites mesmerized by that theory.

Missed me on Twitter? Well, probably not, but if so, there’s an explanation. The thumbsuckers on Twitter locked me out for a week for this innocuous (IMO) tweet:

(NB: “Thumb” is a euphemism. Know what I mean? Nudge Nudge. Say no more.)

The beatdown notice came literally within seconds of posting, meaning that the tweet offended Twitter’s algorithms. Who knew they were so solicitous of rednecks’ feelings?

Lesson learned: next time I’ll say “peckerwoods” instead.

I guess Randy Newman must be banned for life, like James Lindsay (with trannies claiming credit for the censorship):

Twitter’s algo also apparently has some logical issues. The phrase “redneck racists” does not imply that all rednecks are racists. Just that there are racists who are rednecks. Does anyone deny this? Actually, does anyone at Twitter deny this? Indeed, I think it is more likely that the average pierced tattooed fascist at Twitter is highly likely to believe that all rednecks are racists. And they think all people like me are rednecks.

Or maybe Twitter is hypersensitive about accusations that leftists can be racists. They probably should be, because as my tweet suggests, leftist racism is pervasive and far more insidious than the traditional peckerwood variety. Insidious because of its fundamental dishonesty. Its condescension. Its manipulative use of blacks in particular to advance its anti-freedom, anti-American agenda. And the fact that leftists hold far more power in 21st century society than some Klansman wannabe.

Case in point: the leftist effort to rename monkeypox, because the name allegedly stigmatizes black people. Well, if your first association with the word “monkey” is black people, who is the racist, exactly?

Ironically, my time in the penalty box coincided with my reading of a Coase essay “The Market for Goods and the Market for Ideas,” and my watching of a documentary on Monty Python. They both demonstrate how much the left has changed from they heyday of American liberalism to today.

Back in the day, the liberals–the 1960s establishment left (not the New Left)–were the defenders of free speech, not its sworn enemies, as the left is today. The ACLU was all about free speech then: it is all about suppressing it now.

The Python documentary covered the controversy over The Life of Brian, which, among other things, resulted in its censorship in South Carolina at the behest of Strom Thurmond. The documentary showed earnest young liberals protesting the censorship, and defending free speech.

You know that their modern day successors hate free speech, and are the prime supporters of censorship on campus and throughout society generally.

The Coase essay is of particular interest, because he was trying to explain why the left of his day were anti-economic freedom (“market for goods”), but near absolutists on freedom of speech (“market for ideas”). His explanation was that liberals had a vested interest in freedom of speech since they were disproportionately represented in media and academia.

Well, they are even more dominant in the commanding heights of speech today than they were in 1974, when Coase wrote. (In the American Economic Review, I might add. The thought of anything similar appearing in the AER today would be ludicrous. In fact, the thought of anybody like Coase being a leading light in economics today is ludicrous).

So what explains the undeniable shift in attitude from pro-free speech to ardently anti-free speech in the space of 50 years, in the face of the strengthening of the force that Coase identified as the driver of pro-free speech attitudes?

Well, I hypothesize that it is exactly the overwhelming dominance that exists in traditional fora today, combined with the emergence of non-traditional outlets in the internet age. Although liberals held the upper hand in the 1960s, they did not have a monopoly over traditional media or academia then. The environment was more competitive, and liberals thought that they could prevail in that competition and feared they would be squelched to prevent them from prevailing. So they supported free speech because they thought that it worked to their competitive strength.

Now, however, they have a virtual monopoly over print media, television, and academia. They dominate social media, but they face more competition there. So their economic, social, and political interests have flipped: they benefit from suppressing competition, rather than encouraging it.

And as is the case with the regulation of the “market for goods,” vested interests in the “market for ideas” conspire with government in order to advance those interests. The unseemly–and almost certainly unconstitutional–collaboration between the United States government in particular and social media companies is not at all different from the collusion between industry and government to suppress entry and competition that is at the root of Stigler’s now 51 year old article on the economics of regulation.

In a nutshell, the Old Left was in favor of free speech because they believed it worked to their competitive advantage. The New Left hates free speech because they believe it works to their competitive detriment.

This reversal of polarity has nothing to do with principle. It is about power, pure and simple. The “principles” are purely instrumental, and intended to advance the political and social interests of a particular class. The censorship of some peripheral figure over a mild comment indicates how dominant that class is, and how sensitive it is to the maintenance of its dominance. Not a sparrow falls, as it were.

In other words, this isn’t about protecting rednecks from hateful comments: it’s about protecting the social dominance of today’s reds.

The latest hysteria in DC and the media revolves on whether the United States is currently in a recession, given that real GDP has contracted in consecutive quarters. That has always been the good-enough-for-government-work definition of a recession, but the administration and its media mina birds are saying “ackshually that’s NOT the technical definition of a recession NBER blah blah blah low unemployment blah blah blah.”

So what is it? Well, the dimwitted press secretary and the only slightly more witted head of the National Economic Council, the appalling apparatchik Brian Deese, inform us that the economy is “in transition.” From what to what, they don’t say. Just . . . in transition. So I guess the economy is on puberty blockers or something. Because you know those are a thing now.

This obsessing over terminology brings to mind Jimmy Carter’s Chairman of the Council of Economic Advisors, Alfred E. Kahn. In 1980 Kahn made the mistake of referring to the economy being in depression or recession and he was promptly taken to the woodshed by the political types in the White House. Koch then announced he was foregoing use of those words, and would instead say that the economy was in a banana. After Chiquita (if memory serves) complained, he changed “banana” to “kumquat.”

Kahn was a real economist with a real sense of humor. In other words, totally different that the current crowd of humorless lilliputians.

The parallel with Carter demonstrates one thing though: when an administration freaks out about terminology, it means that they are frantic and desperate and have no substantive case to make. But calling a turd ice cream doesn’t improve the taste.

In fact, the economy’s performance is actually worse than the GDP figures alone would suggest. Instead of underperforming for two quarters, the economy has actually underperformed for three quarters. That’s illustrated in this chart of the shortfall of GDP from potential (as measured by the Fed):

Note that prior to the fourth quarter of 2021, the economy was rebounding sharply from the COVID policy-created collapse. (Not the COVID-created collapse: the COVID policy-created collapse.). The rate of convergence of GDP to potential slowed in the quarter Biden took office, then speeded up for a quarter. By 3Q21, the gap had narrowed to $108 billion, and actual GDP was 99.5 percent of potential. But in the fourth quarter, the gap widened by $169 billion. It widened again by $144 billion in 1Q22, and a further $155 billion in 2Q22.

Based on the trend prior to the fourth quarter of last year, it would have been reasonable to expect that the gap would have been closed by the end of 2021. That would have meant about $108 billion in convergence in the fourth quarter. Adding that $108 billion “shoulda” convergence to the actual divergence of $467 billion gets you to $575 billion in underperformance in the last three quarters.

You can say that this isn’t akshually evidence of a recession, and I really don’t care if you do (because it makes you look like an idiot). You CAN’T say that this doesn’t mean the economy has sucked for 9 months. Nine. Not six.

Oh, and of course, inflation has been raging over that period of time.

How’s that Phillips Curve working out guys? Can you say “stagflation”? Well, you probably won’t say that either, but it’s accurate.

And what is our wonderful government doing in these stagflationary times? Well, experiencing another bout of fiscal diarrhea that resembles a colitis sufferer binging on ExLax.

For starters there is the $52 billion CHIPS act, which is a subsidy boodoggle. There is no economic case whatsoever for it. If computer chips are scarce and prices are high, that provides the right incentive to invest. But the chip industry realizes that Uncle Sucker will crank up the printing machine if they whine loud enough. So they whine “supply chain yadda yadda”, and Uncle Sucker turns the crank.

On deck is the odds-on-favorite for most Orwellian named thing of 2022: “The Inflation Reduction Act of 2022.” More government spending (almost $1 trillion) allegedly paid for with higher taxes (which we know never materialize). Since fiscal excess is the main driver of the recent inflation, this Inflation Reduction Act will increase inflation.

It actually might be better if the government dropped the trillion from helicopters and let us decide where to spend it–then we’d just have the inflationary consequences.

But nooooo. The bill ladles out billions in subsidies for “renewable energy” boondoggles which will raise the true cost of energy because “renewables” are notoriously inefficient. (I put “renewables” in quotes because copper, lithium, cobalt, etc., are not renewable.) And it imposes new levies on efficient fossil fuels like natural gas and coal. Which will raise the cost of energy further.

So deciding where to spend what it shouldn’t be spending at all will harm the economy further.

There’s also some health care fuckery included but I can only take so much so you’re on your own to learn about that.

And of course many Retardicans in Congress, especially in the Senate, are totally on board.

Meaning that Congress and the administration are hell bent on fueling stagflation and making energy more expensive and less efficicient, while arguing over the esoteric meaning of a word pretty much everybody understood just fine before, oh, Monday.

Fiddling while the dollar burns. And you’re the one who will get burned the worst.

The Biden Better Than Yous’ most recent brain flash is to impose a price cap on Russian oil. We’re told (by an anonymous senior Treasury official–maybe the ex-economist Janet Yellen herself?) that if we don’t the price of oil could reach $140/bbl.

Oh thank you for thinking of how to save us!!!

Not so fast. That is based on a particular counterfactual: namely, a complete cutoff of Russian oil exports. That counterfactual is totally unrealistic.

Let’s compare to a more realistic alternative–current reality. Russia currently has to sell its barrels at a discount. But even the discounted price is well above the price cap being bruited about. So, if the plan works–which it won’t, for reasons I’ll get into momentarily–Russia would receive a lower price for its oil. Russia’s supply curve slopes up. Yes, it’s pretty steep, but it will export less if the proposed price cap were indeed binding. And if it exports less, world prices will rise. And since the demand curve is pretty steep too, the price rise will be appreciable.

In other words, compared to the current situation, this plan will raise prices if it works.

This is not complicated.

One could rationalize this as a way of reducing Russian oil revenues while having a relatively modest impact on prices. If Russian output was completely price inelastic, the cap would not reduce its output, and world prices would not rise, but Russia would receive less money to blow up Ukraine with.

Brilliant!

Again . . . if the plan works.

This rosy scenario would mean that the plan is oil price neutral. But it would create a huge windfall for any entity that secures barrels at the capped price. That “windfall” is an economic rent, and there will be massive rent seeking to attempt to secure it. And rent seeking will undermine the operation of the plan.

It’s not as if this is a theoretical possibility. Remember why Marc Rich fled the US? Well, one reason was that he sought rents created by Jimmy Carter’s idiotic oil pricing scheme which created different categories of oil with different price caps. “Old” oil was subject to a price cap. “New” oil wasn’t. So enterprising rent seekers like M. Rich found ways to buy old oil and magically transform it into new oil, thereby making bank.

Substitute “Russian” for “Old” and you have Janet Yellen’s current plan. It creates tremendous incentives to evade, and will require tremendous resources to enforce. Uncle Sam no likey, and indicted Rich. But remember Marc died a free man in Switzerland.

Moreover, there are myriad ways to circumvent price controls.

If you are old enough, you’ll remember banks giving away toasters and other small appliances to depositors. Why? Because interest rates on deposits were capped at below market levels. But there was no rule against giving away toasters! So, in essence, interest was paid in toasters.

Think of the possibilities now! Buy a limited edition autographed portrait of Igor Sechin (the old Igor, with a mullet) for $5 million, and Rosneft will throw in 100,000 bbl of oil for $5 million more–a 50 percent discount off the current price, and compliant with the cap! It’s a bargain!

Or maybe buy a Russian toaster for $5 million, and get the 100kbbl for another $5 mil.

Warning: Do NOT accept sausages from Igor.

The bundling possibilities are endless. Side deals run through a labyrinth of shell companies are another way around this.

And don’t forget, one of the main ways that Russian oligarchs got rich in the 1990s was buying commodities at official Russian prices (well below world prices), illegally exporting them and selling at world prices, and then stashing the money overseas.

Meaning that they just have to dust off their old playbooks–they are pros at this. Only this time they will be circumventing foreign price caps instead of domestic ones. And they will have numerous eager accomplices in China, India, South America, and Africa.

And the Russians aren’t the only pros. Do you have any idea about all the invoicing scams in China to circumvent capital controls?

What’s the US going to do in response? Sanction everybody?

In sum, this is a plan that looks great on a whiteboard in economics class, but will not survive contact with the enemy. The enemy being reality.