Streetwise Professor

In January, 1950, Secretary of State Dean Acheson gave a speech outlining the US’s security perimeter–and conspicuously excluded South Korea. Within 5 months, with Stalin’s blessing, North Korea invaded. The opening stages of the Korean War were an absolute military disaster for the US. The rest of it wasn’t great shakes.

Yesterday Biden sent a similarly equivocal signal to Putin on Ukraine, insinuating that Russia had Biden’s blessing to invade Ukraine. As long as the invasion isn’t too big! Whatever that means. The administration then attempted to clean up this shocking statement by saying that any incursion would bring a strong US response. (Cleaning up after Biden is akin to cleaning up after a Barnum and Bailey Circus parade.)

There are war hawks in the US who want to confront Russia militarily if Putin does cross the border, bigly or otherwise–as Biden arguably just invited him to do. This is absolutely insane.

Look at the “correlation of forces.” It decidedly favors Russia. This is especially true in the air, where absent Nato intervention Russia will have not just air superiority but air dominance from the get go.

Yes, the one realistic way that Nato could materially contest a Russian invasion would be by pitting its air forces against Russia’s. (It’s capability on the ground is essentially nil.) It could probably do so decisively. But for what? And assuming it did achieve control of he air, would Nato use air power against Russian ground forces? Logistic resources within Russia? If not, could they change the result on the ground, other than make Russia’s task bloodier and harder? Almost certainly not. When it becomes evident that putative control of the air would not likely change the end result on the ground absent further action, wouldn’t the inexorable logic of conflict push the US/Nato to attack Russian troops and logistics from the air?

Any of these alternatives would bring the US and Nato into direct conflict with Russia where the potential for escalation in many dimensions is high. And again, for what? What American interest (or Nato interest for that matter) is advanced by contesting Russia for Ukraine? Is there any benefit remotely worth the risk of a war, let alone one between nuclear powers that could escalate? I cannot think of any, and those advocating a military response to a Russian invasion have certainly not advanced any.

And it must be emphasized that this would be the wrong war, in the wrong place, at the wrong time. The main beneficiary of which would be China. A futile attempt to save Ukraine would expose the US and its allies to risks of bigger losses in Asia.

Ukraine’s operational situation is dire, and becoming more so. In particular, as if the overmatch wasn’t already severe enough, recent Russian movements in Belarus pose a severe threat. A movement into Ukraine from Belarus would outflank the country’s one major geographic obstacle–the Dnieper (defending which would already concede loss of a third of the country). Ukraine’s only real chance is to hold the Dnieper–and even that would probably require US/Nato involvement. An attack from Belarus would eliminate even that chance.

A Korea outcome is probably the best the US could gain. And again for what? And at what cost, in blood, treasure, and strategic compromise in other theater?

The latest brilliant idea is for Ukraine to wage a guerrilla war against Russian invaders. There are stories circulating that the CIA is helping train organize such resistance, and Canadian special forces who could also do that are in country.

Yes, it took the USSR a decade to restore full control of Ukraine after WWII. And the Russian Civil War in Ukraine was brutal and multi-sided, with Reds v. Whites v. Greens. So it is possible that a Russian occupation could be bloody and costly. Would Putin be deterred by that? Is it worth running the risk of turning Ukraine into Syria or Libya to find out? Would that be better than Russian domination of Ukraine? Yes, Putin is an autocrat, but he isn’t Hitler or Stalin, and Russia isn’t the USSR.

And again, for what?

This is a completely unforced error. Regardless of whether you think Putin is genuinely fearful of Nato incorporating Ukraine, or whether that is just a convenient excuse for him to advance his imperial project, there was never any reason to bring Ukraine into Nato and thereby increase greatly the risk of confrontation. As I’ve said before, its inclusion raises the risk of conflict and detracts from rather than adds to Nato capability.

By dangling this as a possibility, the US and Nato predictably triggered a reaction that leaves them with the unpalatable choice of fighting a war over a country that is not vital to their interests or looking feckless and duplicitous by dangling the prospect of protection and then shrinking from providing it. It also provides Putin with a pretext to challenge all of Nato’s earlier eastern expansion. This juncture would never had been reached had the US and Nato not made promises that were never in its interest to keep. But they did, and that has put them in this dilemma.

My main fear at present is that Biden (or those who are actually making the decisions) will feel compelled to be butch and commit the US to a conflict involving such a huge asymmetry between gains and losses. Hell, even “winning” would involve more loss than walking away would.

How will it play out? I don’t know. Games of chicken are always hard to predict. Especially when one of the players is politically desperate and mentally compromised. And that, alas, is fair description of the president of the US in 2022.

Vladimir Putin has demanded Yalta II. Specifically, a withdrawal of Nato forces to the pre-expansion lines of 1997, which would basically abandon Poland and the Baltic nations.

It is easy to understand why Putin would demand this. It is far harder to understand why the US, and Nato generally, would give this demand the time of day. But it apparently is doing far more than that: it is signaling a preemptive concession.

Hapless, feckless, gormless, chuckleheaded Secretary of State Anthony Blinken sent the signal, in words, not blinkin’ his eyes in Morse Code:

Here's @SecBlinken not ruling out military assets being pulled out of Poland in his interview with @jaketapper on @CNNSotu this morning. pic.twitter.com/Q6HYTusd1M

— Alex Marquardt (@MarquardtA) January 9, 2022

But there’s more!

.@SecBlinken won’t rule out certain concessions to Russia such as moving US weaponry or missiles in Europe or limiting exercises there. @jaketapper: “You must be worried about creating a precedent…” Blinken says it’s not about concessions, it’s about reducing tensions. @CNNSotu

— Josh Rogin (@joshrogin) January 9, 2022

Of course Blinken said, after suggesting unilateral concessions, there would be no unilateral concessions.

Totally credible! Especially in light of US actions in Afghanistan, etc.

As Casey Stengel once said: “Doesn’t anybody know how to play this game?”

FFS, Russia has taken a maximalist position in its negotiating stance. You don’t respond to a maximalist position by playing Caspar Milquetoast.

(And I swear to God, if Blinken’s photo isn’t next to the definition of “Beta Male” in the dictionary, it damned well should be. Who could possibly be intimidated by this guy? Hell, who in Russia or China isn’t wetting themselves laughing at the thought of seeing this guy at the other end of the bargaining table?)

Somebody comes to negotiations with a maximalist position, the appropriate response is: “fuck you and yo’ mama too.” Call the bluff, then talk.

And it’s so unnecessary. Look, Yalta is hardly a credit to FDR’s legacy, but (a) at the time, Stalin had possession of the territories in question, and possession is ten tenths of the law in international power politics, and (b) FDR was a sick, weak man at the time.

Well, I guess (b) pretty much holds today. (As pathetic as he was, FDR was sharper in 1945 than LGB is now.) But with regards to (a), the situation is totally different. Today Nato controls the territories in question. There is no reason whatsoever in order to make any concessions. Zero. Zip. Nada.

Yes. I have said it’s stupid to include Ukraine in Nato. But Poland and other eastern European nations are already in Nato. Totally different situation. Tell Vova to get over it and get used to it. Don’t egg him on by dangling concessions.

But Biden (and, of course, Germany) appear quite willing to shtup Poland yet again.

One wonders what Poland did to anger God. Placing it on defenseless territory between Germany and Russia. And putting its fate in the hands of feckless fools like Brandon and Blinken.

How disgraceful. Especially since Poland has been the most stalwart member of Nato and very loyal to the US. In stark contrast to the perfidious Germans. Yet whom is Biden apparently content to sell down the river? Yes, disgraceful. But this is a disgraceful administration.

One last thing. Can you imagine the shitshow if the Trump administration had bleated out what Blinken did? “See!!!!! He’s in Putin’s pocket!!!! He’s Putin’s puppet!!! COLLUSION!!!!”

But what do we hear now?: crickets.

Nikole Hannah-Jones claims that we are entering a new dark age. I agree! To a point. For Ms. Hannah-Jones is projecting. She and her ilk are the harbingers of a dark age, not its victims. It is the likes of her 1619 Project, and its widespread adoption as instructional material, not the scattered resistance to it that Ms. Hannah-Jones bewails, that represents the advance of the enemies of truth and knowledge and the suppression of Enlightenment values. (It is, alas, but one example of this.)

The Enlightenment was–sadly, use of the past tense may be very appropriate here–a movement against obscurantism, superstition, and most importantly, official “truths” decreed by institutional powers like the church. The Enlightenment allowed individuals to challenge institutions. It undermined traditional power structures and contributed to the liberation of mankind from feudalism and its variants. The Enlightenment has seen its share of excesses and errors, but it is what pushed back the darkness of the Dark Ages. Indeed, it is by contrast to the Enlightenment that the Dark Ages are considered dark: those living during them did not consider them such.

Post-modernism–which infuses Hannah-Jones’ work, and cognate movements like CRT–is profoundly, avowedly, and unapologetically anti-Enlightenment. It denies all of the basic principles of the Enlightenment. It denies that there are things that are true independently of the beliefs of subjective observers operating in systems of power. It is profoundly anti-scientific. And here I mean science as a method, not Science as it is used and abused by post-modernists in power. And it is collectivist and anti-individualist.

So yes, as Hannah-Jones says, we are at serious risk of entering a new Dark Ages. But she is just one of a phalanx of anti-intellectuals posing as intellectuals who threaten to return humanity to the dark days that preceded the Enlightenment they hate so much. Post-modernism is big on irony. It doesn’t get much more ironic than that.

The latest hyperventilation over Russia relates to the alleged involvement of the Wagner Group–Russian mercenaries/paramilitaries–in Mali. Wagner is run by “Putin’s Chef,” Yevgeny Prigozhin.

Russia denies involvement. Wagner denies involvement. Mali denies involvement. Since none of them are remotely trustworthy, I will accept as true that Wagner (or some other Russian entity) is involved.

At one level, one could answer “So what?” or even “Good!” Western militaries, notably American and French, have been involved in the Sahel for years. The US involvement has been marked by some tragic events, notably the destruction of a US Army Special Forces team in Niger and a murder of a Green Beret by other US special operations members in Mali. France recently withdrew its troops from Mali after 8 years of inconclusive fighting that resulted in the deaths of 52 French soldiers, including a highly decorated special operator. (And which also saw two coups in Mali. So much for creating stability.)

The American and French efforts had little effect on Muslim insurgents. So why not let the Russians have a go, if the real objective is to kill Salafists–and the objective isn’t worth American or French lives?

But this level is likely a very superficial one, and that is likely why there has been such alarm at Russian involvement. West and central Africa, including the desolate Sahel region, are now the cockpit of a 21st century version of a “great game” not so much because of ISIS or Al Qaeda, but because of . . . batteries.

And unlike the Great Game of the 19th century, which involved Russia and Great Britain, the 21st century game in Africa involves Russia, the West (especially but not exclusively the US), and notably China. The largely desolate and desperately poor region which the world’s richest nations are contesting is of increasing importance because it is disproportionately endowed with materials like lithium, copper, and cobalt, all essential for the manufacture of batteries or other components for electric vehicles that the alleged green elites in the West claim will be our climate salvation.

And don’t think that the Salafists are solely motivated by religious fervor–they no doubt understand the economic calculus as well. If oil made Saudi Arabia, another otherwise desolate and impoverished region, what economic power could control over lithium, copper, and cobalt create? Oil fueled Wahhabism. EV materials could well fuel another radical Islamist movement.

A rallying cry of the left, and especially the environmentalist left, from the 70s onward was “no blood for oil!” No doubt their CO2 monomania, and the resultant obsession with electrifying everything and especially electric vehicles, has blinded them to the inevitable if unintended consequences of their idée fixe.

Specifically, realizing their vision will require vast amounts of materials. Put aside the environmental consequences of mining for these materials. Focus on the geopolitical consequences. These minerals are found disproportionately in vast, violent, and largely ungoverned spaces. Control over them can be achieved only by violence, and even if violence was not necessary, the incentive for unscrupulous governments and corporations to utilize violence to capture the rents these resources promise (especially in an electronic world) is great indeed.

Furthermore, the powers contending for these resources are facing off on every continent, and are armed with nuclear weapons. What starts in Africa is unlikely to stay in Africa. And something could very well start in Africa. Great Power conflicts almost erupted in Africa on several occasions in the era of imperialism, when the economic stakes were far smaller: what did Fashoda matter, really? Yet Britain and France almost went to war over it. The stakes are far larger now.

Especially in a world obsessed with replacing petroleum with electricity.

Methinks that the evident panic over Russians in one of the world’s armpits really has little to do with the stated reasons: again, why would France or the US mind if Russians killed Salafists, and took the casualties necessary to do it? Instead, the panic is over the prospect of an impending struggle between the US/Western Europe, China, and Russia over a vital economic resource in an ungoverned region that requires organized violence to control it.

Environmentalists are so absorbed in their monomania that they are oblivious to the unintended consequences thereof. They have lectured us for years about no blood for oil. What about blood for batteries? Because that is the inevitable consequence of replacing the former with the latter.

They need to be forced to face this reality and to own the consequences of their obsessions. Now.

The private automobile has been the greatest liberating invention in history. Before the automobile, individual horizons extended a few miles for most. With the privately-owned car, billions of people have been able to travel where they want when they want. It has made it possible to separate considerably the workplace from the living place. It has expanded the range of stores and restaurants and service suppliers available to people. It has made travel–sometimes at a whim–possible in ways it was not possible before its widespread use.

So of course the world’s “elites” hate the automobile. Because they hate personal freedom.

A couple of data points.

First, consider this from the UK: “Car Ownership Could End in Massive Overhaul of UK Roads.”

A few excerpts (but read the whole thing):

GOVERNMENT transport ministers have backed calls to end private ownership of vehicles in a major overhaul.

She said the country needed to move away from its “20th-century thinking centred around private vehicle ownership”.

She added it was “staggering” almost two-thirds of trips were conducted by lone drivers.

How dare those proles weight the benefits and costs of going where and when they want alone vs. coordinating with others!

The Government has repeatedly stressed the need to switch from a reliance on cars to other forms of transport.

Oh, if the government says so . . . Better not disagree with our betters, given how remarkably competent governments are!

They said this was one of the “biggest opportunities” to switch short car journeys to cycling and walking.

In the rain? In the snow? When it’s 90 degrees? When its 20 degrees? At night? If you are elderly or infirm? If you’ve worked all day and really don’t want to walk 3 fucking miles? If you are going to the grocery store to pick up a week’s groceries for a family of 4?

I could go on.

Supposedly new technology will allow various forms of ride sharing.

Have they heard of Uber? Lyft?

People have always had the option to ride share. They typically choose otherwise. For obvious reasons. They have more options now. And again, they typically choose otherwise.

One wonders if these people actually live in the real world.

They also tout public transport. Which has been the hobby horse of the control freaks since forever, and with few exceptions driven by urban density and legacy investments has been a massive financial black hole. Further, although sitting in traffic is often a bad experience, being tied to public transport and exposed to the crowding, crime and assorted lunatics that it entails, not to mention the lack of flexibility, is quite often far worse than driving bumper-to-bumper. Which is why people choose not to use it, and why it is a financial black hole.

Again, let people choose. But no–that’s not the elite way! We’re too stupid to choose. We choose wrong.

Another data point:

“The Government is Your Next Car Passenger.”

Section 24220 of the [“infrastructure” law], titled Advanced Impaired Driving Technology, directs the secretary of transportation to issue a rule within three years requiring advanced impaired driving technology in all new vehicles, although the rule may be delayed if the technology is not ready for implementation. Automakers have up to three years after the rule is issued to comply.

Now, as written (though vaguely) this technology will be limited to detecting/monitoring “impaired driving.” Potentially laudable. But this is the camel’s nose under the tent. The future possibilities are endless. Speed control: all cars in Europe after 2022 must be fitted with speed limiters. Driving is bad for the climate, right? So driving must be limited directly or indirectly, and governments are hot to do that. One proposal in the US is impose a mileage tax. A system that can monitor if you’re buzzed can certainly count how many miles you drive, sober or drunk, send the results to the IRS or whomever, so that you can be charged accordingly. Or maybe you’ll get a mileage ration, and your friendly government sensor will shut down your vehicle when you’ve reached it.

Again the common theme here is that governments do not like the autonomy that private automobiles provide and are moving to impose, inch by inch, limitations on that autonomy. Leftists have always hated the automobile. They’ve always loved public transport. The former gives you freedom. The latter gives them control.

Guess which one they want, and will do anything to achieve?

And it’s not just automobiles. The elite–including the private jet elite–hates airline travel that lets the proles visit family or have a holiday at a pleasant location. Whether through carbon taxes or carbon credit pricing they will squeeze mass air travel like a python.

The main characteristic of serfdom was that people were tied to the land. Serfs moved or traveled at the sufferance of their lords, who almost never granted it. Restrictions on personal mobility whether by car or plane are not quite so draconian, but they rhyme. You will travel the road to serfdom on public transport.

Right now these restrictions are but specks on the horizon. But that is no reason whatsoever to discount them. They are part of a broader agenda, and the mere existence of that agenda and the conviction–and power–of those who advance it makes these restrictions a very, very real possibility.

Whether you want to call them leftists, or progressives, or globalists, or transnational progressives, etc., the “elites” in and out of government (e.g., the WEF, people like Bill Gates or George Soros or Jeff Bezos or Larry Fink) are central planners at heart. They are like Adam Smith’s Men of System, who believe (a) they can arrange society, and people in society, like pieces on a chessboard, (b) only they are possessed of the special knowledge and intelligence to do that arranging, (c) their arrangements are completely rational, and crucially (d) you are too ignorant and/or stupid and/or selfish to know what is rational for society and that as a result you make irrational choices. So your choices MUST be sharply constrained, if not taken away altogether.

For your own good, you know.

Note: most of these people admire China.

It’s all about control, in other words. And if you have been paying attention–hell, if you’ve been sentient–for the past two years you will realize that the push to control you is omnipresent. COVID–or more exactly, the responses to COVID–should give you all the evidence that you need. Most policies, whether it be lockdowns, or masks, or mandated “vaccinations” of dubious efficacy and largely unknown risk profiles, or vaccine passports, and on and on and on, make little if any sense as health measures: at the very least they are not backed by evidence that even remotely matches the fervor with which they are imposed and advocated.

But they do make perfect sense if you conjecture that the real objective is to expand and cement the control of the “elites” over vast swathes of your life. Everything in the last two years has been about depriving you of choice, and giving control of your life to bureaucrats and politicians and the plutocrats who exercise undue influence over them.

That is why these emerging threats to your personal mobility, and the autonomy that provides, need to be taken deadly seriously. They are just one piece of a far broader assault on liberty and autonomy, and a campaign intended to make you just another brick in the wall.

Back oh-so-long ago, during the California electricity crisis and its aftermath, I would say that California wanted to deregulate its power market in the worst way, and succeeded. (Wanting to keep up my ESG score, I recycled this line to describe Gibbering Joe’s Afghanistan exit.)

The main design failure of California’s restructuring (a more accurate description than deregulation) of its power market was that it capped retail prices for the two largest utilities in the state (SoCal Edison and PG&E) while requiring them to acquire power at market-determined wholesale spot prices. (San Diego Gas and Electric had met criteria to allow it to enter into long term forward purchase contracts and as I recall was not subject to the same retail price cap.). Thus, SCE and PG&E were massively short wholesale (spot) power. When those prices spiked, due mainly to fundamental factors, the utilities hemorrhaged cash and hurtled towards bankruptcy. Their financial distress led to further dislocations in the California market (and the western US power markets generally).

The world is currently undergoing what is being called an “energy crisis,” focused on power markets, and their inputs, mainly natural gas and coal. There are two parts to this “crisis,” one fundamentally driven, the other driven by ill-conceived regulatory and political factors redolent of California circa 1999-2001.

The most pronounced indicator of the fundamental-driven stress is the price of liquified natural gas (LNG), which has reached dizzying heights.

That price spike is in early “shoulder” months, boys and girls. Lord knows what the peak demand months have in store.

And that’s the nub of the problem: storage.

Historically, natural gas has been a “spikey” commodity. The shale boom mitigated spikeness in US natural gas prices, but periodic price spikes are an inherent feature of storable commodities. The truly motivated can read about it in my book, but the CliffsNotes version is this. It is optimal for inventories to run out periodically: if inventories were never exhausted, some of the commodity would never be consumed, which makes no sense. So “stockouts” will occur periodically. When they do, it is impossible to accommodate demand increases or supply declines by drawing down on inventory. Instead, prices bear the entire burden of adjusting to a demand shock (for example). Thus, periodically stocks will be tight, and when they are, a demand increase causes prices to rise dramatically (because inventories can’t cushion the blow).

The cover illustration in my book, based on a purely theoretical model of a storable commodity market, illustrates the point. Note the periodic spikes.

That is, price spikes are inherent in storable commodities.

The magnitude of the price spikes is amplified by the nature of natural gas production and consumption. Both demand and supply are extremely inelastic. The inelasticity effects optimal storage decisions, but when natty inventory constraints bind, inelasticity means that price impacts of shocks are extreme.

This is why going short natural gas (or shorting the calendar spread especially in the winter) is referred to as a “widow maker” trade.

There are lots of widows out there today. In essence, a hard winter of 2020/2021 depleted stocks. The 2020 COVID demand collapse and subsequent price crash (JKM traded at $2.20/mmBTU in May 2020) cratered drilling, constraining current supply (as wells drilled then would have been producing now) making it difficult to build stocks. Warm summer weather in 2021 drained stocks and impeded stock build. Outages in Norwegian production, and a wind drought in the UK (which required greater utilization of gas generation) stoked demand. Stocks are now at historically low levels, setting the stage for even bigger spikes this winter.

The gas market–due to LNG–is now international, meaning that shocks in any region impact prices around the world. Asia (especially China) and Europe are now playing tug of war for gas, and prices are spiking in both places.

Since gas and coal are substitutes, the price spike in gas is resulting in a price spike in coal:

Oil can also be used to generate power, although this has become relatively rare in recent years. However, the spikes in gas and coal are making fuel switching to oil more attractive, and additional gas/coal price spikes in the winter will likely result in more use of oil in electricity generation, which will put upward pressure on oil prices too.

This is all fundamentals driven, and exactly what occurs periodically in storable commodities. There’s nothing really that can be done about it, policy wise. But that won’t stop governments from trying.

You’ve no doubt read of energy “shortages” in recent days and weeks. Well, low supplies and high prices are not a “shortage” per se. A true shortage is a failure for a market to clear, resulting in queueing for the good. That is, a shortage occurs when the price is kept to low, leading to a gap between the quantity demanded and the quantity supplied.

Think gasoline lines in the US in the 1970s.

That’s where regulation comes in. Various regulations, adopted for political economy reasons, create shortages and the other dysfunctions currently observed in world energy markets.

Take China. The authorities have implemented power rationing. The reason commonly given is a “coal shortage.” Yes, coal prices are high in China (and the world), but that doesn’t create a true shortage. What has? Power prices are capped. The big increase in input costs (both coal and LNG) mean that Chinese generators can’t sell profitably, so they restrict output, leading to a true shortage.

What this means is that the shadow price of power–the price that market participants would be willing to pay for an additional megawatt–is (a) above the regulated price, and (b) above the market clearing price. Consumption would be higher in the absence of the price cap.

High coal prices do not reflect a “shortage”, properly defined. Yes, they represent constrained supplies, but that is not a shortage.

And do not forget that China’s coal supply constraints (and high prices) are in large part a result of their brilliant central planners. China imposed quotas on coal production some years back. The reason was–wait for it–coal prices were too low. Now the government is winking at the quotas in order to encourage production–because prices are too high.

India is another country where the Californiaesque capped power price/uncapped input price problem is rearing its ugly head.

France is going to cap gas and power retail prices, but make suppliers whole (though how it will do so remains unstated as of now). Compensating suppliers (effectively having the government pay the difference between marginal cost and the capped price) will prevent true shortages, but will have the perverse effect of exacerbating the spikes in gas and coal prices because at the capped price consumers will not internalize the true scarcity of fuel, and will overconsume.

The UK is experiencing another echo of California. Several of its retail gas suppliers have imploded because they are required to sell at a capped price and chose to cover their sales commitments by purchasing wholesale spot. The price cap made no sense: competition among retail suppliers would have kept prices in line. Adding the price cap just put the competitive retailers at risk of bankruptcy. (Admittedly, such can occur when retail prices are not capped if retailers offer fixed prices to consumers and don’t hedge, as occurred in Texas this last winter. But price caps make that outcome more likely.)

The UK is also suffering a true shortage of gasoline–excuse me, petrol–a la the US in the 1970s. A true shortage, because there are lines:

Man heads to the petrol station with his horse to 'stir up' some laughs pic.twitter.com/NsPiW8Ijcg

— The Sun (@TheSun) September 29, 2021

Scarcity of truck drivers to distribute fuel is at the root of the problem. But that can’t lead to a true shortage–lower supplies and higher prices yes, but not a shortage with people waiting in line. So what gives?

Apparently there was an information cascade about impending shortages, which led to a panicked run for gas stations. This evidently started with a leak (probably politically motivated) of cabinet deliberations.

A sudden demand increase of this magnitude can lead to true shortages–queueing–if prices do not rise to clear the market. This raises the question of why petrol sellers didn’t increase prices. I’m not aware of formal caps, but I surmise that fear of allegations of “gouging” led retailers to choose to allow customers to pay the high price implicitly (through the time cost of sitting in line) rather than raise price to reflect the sudden (and perhaps contrived) scarcity.

For storable commodities like natural gas, coal, and refined petroleum products, price spikes can last for some time. That’s what we are experiencing today: it’s just one of those spikes like on the cover of my book that happen in commodity markets. Given that we are going into a peak demand season with constrained supplies, the prospect for a continuing spike–and indeed, a higher spike–is very real indeed.

Governments can’t change this fundamental reality. Market prices are sending a signal about underlying conditions. Governments don’t like the message the prices are sending, and will try to do something about it. Alas, their knee-jerk response–to shoot the messenger by capping prices–will make things worse, not better. But because governments can’t help themselves, look for many 1970s energy market flashbacks in the coming months.

The basic lesson of Milton Friedman and Anna Schwartz’s majestic Monetary History of the United States is that most major economic disruptions in the history of the US have monetary origins. Since 1913, and the creation of the Federal Reserve, the Fed has been responsible for these monetary shocks. Which is why Friedman advocated rules over discretion, to reduce the degrees of freedom available to the Fed to fuck things up.

For this, with a few exceptions, Fed board members and chairs have hated Friedman, and attempted to devise alternative histories that blame others for Fed f-ups. Current Fed chair Jerome Powell has joined that crew of ankle biters.

The price level has spurt upwards lately, leading to fears of a resumption of 1970s-style inflation. Not wanting to admit that the current price level increases could be harbingers of true inflation (a sustained rate of increase of the price level), Powell is attempting to argue that these recent increases are due to idiosyncratic factors (e.g., COVID-related supply chain shocks) that will not persist. In an attempt to make this case, Powell has engaged in a revisionist history of 1970s inflation.

In a nutshell: it was your fault. Or your parents’/grandparents’ fault. So if inflation happens again, it’s your fault.

The basic story is this. There were supply shocks in the 1970s (e.g., OPEC) that caused price level increases. These caused people to believe (mistakenly, per Powell) that there was true inflation. These inflationary expectations were self-fulfilling: these expectations decreased the demand to hold nominal balances, which increased the velocity of money, which per the PY=MV equation led to an increasing price level, which confirmed inflationary expectations, which kept velocity high, etc., etc., etc.

There is a core of truth to this: expectations matter in inflation. But monetary growth matters too, and money growth in the 1970s was clearly as much of a driver of inflation as a shift in expectations. Indeed, the money growth was likely a cause of the shift in expectations.

Inflation peaked and subsided when the Fed (under Volcker) put the brakes to monetary growth.

Why does this ancient history matter? Because Powell is using it to justify standing pat on monetary policy despite the recent price spurts. Sort of like someone Powell should NOT want to imitate–Arthur Burns, who made very similar arguments in the 1970s. It was exactly the same don’t worry, be happy complacency that Powell expresses today that led Burns–and the country–down the path of inflationary perdition.

Indeed, Powell’s mistaken-inflationary-expectations argument is all the more reason to take aggressive action today to prevent a shift in inflationary expectations. If he really believes we’re all idiots who will confuse one-time price level shocks with true inflation, he should take aggressive action to show credibly that the Fed will not let inflation take hold. Using it to rationalize inaction which will likely exacerbate a shift in expectations is frankly idiotic.

And also like the 1970s, we are seeing a Democratic administration attempt to rationalize and blame. Case in point, Director of the National Economic Council Brian Deese. This oh-so-typical DC cockroach (who scuttled to Black Rock after the end of the Obama administration only to scuttle back to Washington with the ascension of a Democratic administration) was at pains to educate you idiots that what you are experiencing at the grocery story is a figment of your imagination, except when you pass the meat counter:

https://twitter.com/Breaking911/status/1435679846307405830?s=20

So I guess vegans should be happy!

This is transparently bullshit on many levels.

First, Deese is literally cherry picking by focusing on fruits and vegetables.

Second, if you look at other ag prices–notably corn, soybeans, and wheat–they have spiked in the last year (although they peaked in the summer and have turned down slightly). The increase in food prices is not limited to meat and poultry.

Here’s corn, for example:

Third, even looking only at meat and poultry Deese’s economics are idiotic and indeed represents another acid flashback to the 1970s.

For one thing, the consolidation in the meat sector occurred years ago, and cannot explain the increase in prices now. Furthermore, firms with market power raise prices above the competitive level, but that is different from causing an upward trend in prices (which is what inflation is). In attempts to deny the true cause of inflation in the 1970s, it was common for liberal politicians and liberal economists to blame “monopolies”: again, this is transparent bushwa, because although monopolies can raise price levels that’s different than causing an increase in the rate of change in the price level.

Indeed, ceteris paribus greater consolidation in the meat sector would tend to reduce input costs (e.g., corn and soy prices): greater monopsony power tends to decrease not increase input prices. That has obviously not happened in the last year. As noted above, corn, soy, and wheat prices have all spurted.

So there’s something else driving food price increases. Deese’s attempt to explain away what your lyin’ eyes see when checking out at the grocery store is pathetically and obviously wrong.

There may be a reason why this is a one time shock rather than a true inflationary trend. But Deese doesn’t provide any such reason, and his risible attempt to provide one seriously undermines his credibility.

And that ultimately is the problem. In the 1970s, the Fed’s and the Carter administration’s attempts to cast blame for price level increases undermined their credibility and contributed to the expectations spiral that Powell laments today. The 70s flashback of just such denial we are experiencing before our very eyes is the strongest indicator that real inflation will return. And with a vengeance, given the far weaker fiscal position of the US government (cf. the fiscal theory of the price level).

Bowe has been the shy and retiring type since his exchange for five Taliban leaders seven years ago. So where’s Bowe?: Bowe knows! but not me. Said Taliban have been anything but retiring, however. When they were released Obama said they would never return to the battlefield again: TRUE! There was no battle to speak of in Afghanistan, but these guys sure enough showed up for the victory parade–as part of the Taliban leadership.

I questioned at the time trading multiple Taliban leaders for one American loser/deserter. The exchange rate comes to mind given that the Taliban now have their hands on many Americans who did not desert, but were abandoned by the US. Do you seriously think the Taliban–or even less savory elements in Afghanistan–will not extract an even higher price for them?

This thought is intensified by observation of a brisk and strange traffic in recent days. If you’ve followed flight tracking services, you may have noticed many unidentified Boeing 767 flights between various US-related origins (e.g., DC, Rammstein) and Sofia, Bulgaria, and Sofia, Bulgaria and Doha, Qatar. That is, flights without call signs or aircraft IDs. Qatar, moreover, is facilitating the reopening of the Kabul airport. Connect the dots.

What is on those flights? Guns? Money? Not likely lawyers (too bad!), but perhaps human cargo approved by lawyers? Apparently just as United hubs out of Houston, the CIA runs a hub out of Sofia. Why? For what purpose?

Afghanistan’s current overlords have substantial leverage over the US. No doubt they are exploiting it to the hilt. If we gave up so much for Bowe Bergdahl, consider what we would–and likely have–given up for Taliban forbearance during our withdrawal, and will give up for continued forbearance and future human exchanges.

Once upon a time “millions [update to ‘trillions’] for defense, not one cent for tribute” was an American battle cry. Once upon a time. No more. We are almost certainly paying massive tribute to entities far more sinister than the Bey of Algiers or the revolutionary government of France. In secret–secret from the citizens of the US, that is.

The humiliation continues and will continue.

Apparently the Biden administration is betting that the American people will indeed embrace it:

President Joe Biden is brushing off criticism of his administration’s chaotic Afghanistan withdrawal because he and his aides believe the political fallout at home will be limited, according to White House allies and administration officials.

Biden and his top aides argue they are managing an evacuation mission as well as could be expected given the faster-than-anticipated takeover of the country by Taliban insurgents, and are seeking to draw attention back to the choice to get U.S. troops out of the country.

The strategy is based on internal and public polling that shows the Afghanistan withdrawal had been by far the most popular decision Biden has made, even though the issue was not central for most voters.

The condescension here is palpable: Howdy Doody Biden and his various Charlie McCarthys believe that you are too stupid to be able to distinguish between a reasonable decision to exit and a catastrophically bundled way of doing it, or too apathetic to care.

This is so Soviet. Pretty much the same PR strategy the Soviets employed during Chernobyl and other assorted disasters: lie, deny, suppress, and depend on an apathetic populace to acquiesce meekly to the barrage of lies.

Speaking of the Soviets, during a “press conference” today, Biden did a great late-70s Brezhnev impersonation. He needs to put on some weight to give the full effect, but in terms of senescent befuddlement and denial of reality, he’s got it down pat. Among his most pathetic denials: no American is having problems getting to HKIA. Apparently their Uber apps are working great! He also blew off reports that diplomats on the ground had sent warnings about an impending disaster. His reply: Hey, I get cables all the time. I went with the consensus view. The consensus isn’t always wrong, but it usually is, especially in bureaucracies built on groupthink and ass kissing.

We can also expect to see a ramping up of Soviet-like distraction operations. Most notably: look for a barrage of COVID hysteria–directed at Republican governors in particular–and a focus on various domestic issues, notably voting legislation and massive stimulus bills (aka turning the US into an economic Afghanistan, except that we won’t grow our own opium.)

Those of you not in a memory care facility (so this perhaps does not apply to Joe Biden) remember the hysteria over Trump’s treatment of Nato. Yes, Trump rhetorically bashed Nato nations repeatedly for their utter failure to live up to their commitments on defense spending, and their perpetual free riding on the US. Yeah–I’m looking at you, Germany. How are those broomsticks working? But even though he spoke truth, truth was apparently undiplomatic. And we can’t have that! So one of the “elite’s” key briefs against Trump was his disrespect for our allies: Biden, they assured us, would treat them with respect and that would advance our collective interests.

When Biden won, he went about preening that “America is back” and that he would restore the alliances Trump had allegedly ruptured. The Europeans panted for a Biden presidency, and rejoiced at its arrival.

How’s that working out for you?

When shit got real and the chips were down, Biden totally shtupped Nato allies, whom you might know have suffered over 1,100 KIA in Afghanistan over the years (about 1/2 of US military personnel losses).

He failed to inform Nato allies what he was doing. In particular, the UK–the US’s most reliable and longstanding ally–was completely left out of the loop. When UK PM Boris Johnson frantically attempted to reach Biden, Joe didn’t answer the phone. Maybe he was washing his hair (plugs).

Even now, when coordination on the ground with allies in Afghanistan is paramount, there is precious little of it.

Joe decided to bug out–and not tell anybody about it, most notably the allies that he had so sanctimoniously claimed to have rescued from the clutches of the demon Trump.

How’s that for respect?

Deeds, not words, matter. A western elite that clutched pearls and collapsed on fainting couches over mean tweets that happened to drop truth bombs got exactly what it asked for. A man who mouthed meaningless pieties and cut and ran and left the elite in the lurch when it mattered.

The ranks of the soi disant elite is a target rich environment, but a few stand out. One is alleged conservative Bill Kristol. Search Twitter “@BillKristol trump nato” and you will find numerous tweets by this fat tub of goo armchair warrior excoriating Trump for being a meanie to Nato. This is my favorite:

Weakening NATO, picking fights with allies, refusing to prefer democracies to dictatorships–these aren't idiosyncratic bugs of Trump's foreign policy. These are features of an America First foreign policy, which Trump is increasingly if somewhat chaotically pursuing.

— Bill Kristol (@BillKristol) July 13, 2018

Chaotically. Oh the irony is too much. You had no idea about what true chaos is, you neocon (emphasis on the “con”) knob. We’re seeing it now–because we got what you and so many of your “elite” ilk begged for.

The elite sowed the wind with their hysteria over Trump’s bumptiousness with American allies. They are reaping the whirlwind with their boy Biden’s utter betrayal of selfsame allies.

Actually, all of us are reaping the whirlwind–including those (unlike Bill Kristol et al) who realized that Biden was an incompetent and amoral windbag who would wreak havoc, like some evil version of Mr. Magoo.