US President Joe Biden is considering forcing the nation’s fuel suppliers to keep a minimum level of inventory in tanks this winter as a means of preventing heating oil shortages and keeping prices affordable. It may actually do the opposite.
Well actually actually, there’s no “may” about it. It will, if the administration indeed forces away.
As I’ve written previously, there are times when economic conditions make it optimal to hold low (and perhaps no) inventories. When the supply/demand balance is expected to improve in the future, holding inventories moves a commodity from when it is relatively scarce, to when it is relatively abundant. It is better to do the opposite. But since you cannot transport future production to meet present consumption, the best thing to do is to draw down inventories–perhaps to zero.
There is no reason to believe that the market has “failed” to respond efficiently to fundamental conditions. There is absolutely no reason to believe that Joe Biden or anyone who works for him has solved the Knowledge Problem and knows how to allocate scarce diesel over time better than the markets do. Do you really think Joe et al know that the supply/demand balance in diesel is actually going to get worse, when the market judgment is the opposite? If you do, seek help.
So yes, if carried out, this action would increase spot prices because the only way to increase inventories is to reduce current consumption, and the only way to increase current consumption is through higher spot prices. Further, this action would tend to depress deferred prices because it will increase future consumption.
So if he does this, it would be totally correct to put one of those “I did that” stickers on a diesel pump.
It’s ironic to note that mandatory government stockholding programs, sometimes seen in agricultural markets, are intended to increase prices (to help farmers, for instance). It’s also ironic that Biden is floating this after months of drawing down on government inventories of crude in the SPR–in order to reduce prices.
What Biden is proposing could be seen as a government run corner: the antitrust case of U.S. v. Patten (1913) identifies one of the salient features of a corner as “withholding [a commodity] from sale for a limited time” with the purpose of “artificially enhancing the price.” Biden is proposing “withholding” diesel from the market.
Or, using more archaic language, it is government run “engrossing” or “forestalling,” something that speculators are often (wrongly) accused of, as Adam Smith wrote about in The Wealth of Nations.
The only good news to report here is apparently market participants think this idea is so stupid that not even this administration will implement it. Diesel flat prices and calendar spreads haven’t moved much after Biden’s announcement.
But it would be much better if the administration actually had some good ideas rather than a stream of bad ones, some of which are so obviously bad that they will never come to fruition.
As day follows night, the vaporization of FTX has spurred calls for regulation of crypto markets. Well, what kind of regulation, exactly? It matters.
It appears highly likely that SBF and his Merry Gang (of pervy druggies?) broke oodles of laws, in multiple jurisdictions. Class action lawsuits are definitely incoming, and the DOJ’s SDNY attorneys’ office is commencing a criminal investigation. No doubt criminal investigations will follow in other locations. So what would more laws accomplish, and what kind of laws and regulations would help?
It is interesting to note that SBF was going around DC and the media talking up regulating the industry, and winning effusive plaudits (but not from CZ!) for doing so, but his proposals didn’t come within a million miles of his alleged wrongdoing. I’m sure you’re shocked.
On CNBC, Bankman-Fried endorsed three regulatory endeavors: stablecoin auditing, “markets regulation” of spot trading, and token registration (at about the 4:30 mark):
None of which touches on the fundamental issue in the FTX fiasco, and in crypto market structure generally: the role of “exchanges” in supplying broker dealer and banking services, including liquidity, maturity, and credit transformations.
No doubt SBF was adding to his savior glow by pushing regulation that he knew was utterly irrelevant to the core of his business (and the business of all other crypto “exchanges”). And look at how many suckers fell for it.
So what would help? As I noted at the outset, FTX, Bankman-Fried, et al likely violated numerous laws. So what additional laws would reduce the likelihood and severity of such actions?
In thinking about this, remembering the distinction between ex ante and ex post regulation is important. Ex post regulation involves the imposition of sanctions on malfeasors after they have been found to have committed offense: the idea is to deter bad conduct through punishment after the fact. In contrast, ex ante regulation attempts to prevent bad acts by imposing various constraints on potential wrongdoers.
The choice between ex ante and ex post depends on a variety of factors. Two of the most important (and related) are whether the bad actor is judgment proof (i.e., will have the resources to recompense those he has harmed) and the probability of detection. (These are related because a low probability of detection requires a higher penalty to achieve deterrence, but a higher penalty increases the chances that the wrongdoer is judgment proof).
In the case of things like what has apparently happened here, the probability of detection is high (1.00 actually), but the magnitude of the harm is so great and the (negative) correlation between the harm and the wrongdoer’s ability to pay is so high (essentially -1.00) that ex post deterrence is problematic.
(Judgment proof-ness is actually a justification for criminal law and the use of incarceration as punishment. Deterrence through fines doesn’t work with broke bad guys, so non-monetary punishment is necessary–but often not sufficient!)
So there is a case for ex ante regulation here, just as there is a case for ex ante regulation of banks and intermediaries like broker dealers and FCMs. Banking examiners, regulatory audits, customer seg rules, and the like.
But these are obviously not panaceas. Bank fraud still occurs with depressing regularity, and the things that facilitate it, like valuation challenges, accounting shenanigans, and so on, occur in spades in crypto. And, even in highly regulated US markets, violation of seg rules and misuse of customer assets occurs: yeah, I’m looking at you John Corzine/MF Global.
The big problems in crypto markets are essentially agency problems, especially since the crucial agents–crypto “exchanges”–are so concentrated and so vertically integrated into both execution and various forms of financial transformations.
Ex ante regulation focused on such issues could be a boon, and could help stabilize crypto markets generally. The spillovers we are seeing from FTX’s vaporization are essentially a reputational contagion: the mini (so far) runs on other “exchanges” reflect FUD about their probity and solvency. (NB: Binance, as the biggest “exchange,” and as opaque as FTX, is a serious run risk. BlockFi and AAX may already be in the crosshairs here: glitch in the systems upgrade. Riiiiigggghhhht.)
The challenge is that the demise of financial intermediaries is well-described by a famous Hemingway quote:
“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually, then suddenly.”
An intermediary can go along swimmingly, meeting all seg requirements and the like, and a big market move or bad bet or an operational SNAFU can put it on the brink very suddenly–and encourage gambling for resurrection by using customer funds to extend and pretend. So don’t expect such regulation to be a panacea, and prevent the recurrence of FTXs. Regulation or no, this happens with intermediaries that engage in liquidity, maturity, and credit transformations that are inherently fragile. (And may be fragile by design, as Doug Diamond has pointed out.)
On the regulation issue, one fascinating sidebar is my old bête noire, Gary Gensler. You don’t need to play 6 Degrees From SBF to ensnare most of the Democratic establishment: one or two degrees will do, and Gensler definitely qualifies.
In addition to the MIT connection, Gensler apparently had other interactions with Bankman-Fried. And of course Gensler is a player in the Democratic Party (he was Hillary’s campaign’s finance chair, after all), and Bankman-Fried was a major Dem donor (second largest after Soros in the most recent cycle, and he had talked about spending up to a billion in the 2024 campaign).
I am reserving judgment, but I hope someone takes the time to examine the links and interactions between SBF/FTX and Gensler (and other DC creatures)–and build the evidence and facts, if it comes to that.
My guess is that Gensler will try to pull a judo move and use this fiasco as a justification for expanding the power of the SEC. Indeed, I expect him to be in high dudgeon precisely to deflect attention from his (and his party’s) links to SBF. Don’t let him get away with it.
And don’t think that these links can be exposed through a FOIA. Gensler has long been known for using his private email to conduct official business. (Which is precisely why I didn’t bother FOAI-ing him years ago regarding my suspicions of his interactions with David Kocieniewski.) So deeper digging is required, and it should commence, post haste.
Has-been attention hound (I cleaned that up!) Hillary (this phrase would be just as alliterative if I had used the original word!) went onto the Joy Reid show to discuss political violence in the aftermath of hammer time with Paul Pelosi. She claimed that the attack on Pelosi is reflective of “a streak of violence, of racism, misogyny, antisemitism.”
Er, it was an attack on a white male Italian Catholic. 0 for 3 there, Hillary.
This demonstrates the intellectual laziness of the left. They are as predictable as my daughter’s old See and Say Barbie: pull the cord and the same phrases come out, time after time after time. Racism blah blah blah misogyny blah blah blah white supremacy blah blah blah.
But it’s more than just laziness: it’s a signal of who is beyond the pale. A signal that the people at whom these epithets are hurled so repetitively are to be shunned, ostracized, and worse. So facts don’t matter. There need be no basis for the assertion. They are nothing more than imprecations hurled at the hated. Marking with the sign of the beast.
It is beyond unseemly that the Democrats’ race to politicize the assault on Pelosi began within nanoseconds of its disclosure. With absolutely no basis, the Democrats and the media (pardon my stutter) pegged the assailant as driven to madness by MAGA.
No, by all appearances, he was driven to madness by madness, and had arrived at the destination years ago. And he lived in Berkeley for crissakes. The city with the lowest Trump vote in the nation. And those who did vote for him were probably so zonked out of their minds they didn’t realize what they were doing.
And though I will not speculate about the assault–I have questions! Which the SF police seem hell bent on not answering, refusing to release police body cam footage (the assault itself occurred after police had arrived) and home security footage. If it’s so open and shut, why the secrecy? (In a characteristic display of New Speak, the WaPo claims that releasing more evidence would feed conspiracy theories not dispel them. Riiiiggghhhht.)
It’s also interesting that the Feds swooped in to indict the perp, even though most of the crimes are clearly local in nature–B&E, assault with a deadly weapon, attempted murder, etc. No doubt given San Francisco’s very lenient bail policies the Feds want to make sure this guy stays on ice and doesn’t start blabbing. (This also protects the SF police and prosecutor from having to explain away double standards if they did not release the suspect, given they release pretty much everybody else.)
Speaking of ICE, since the politicization door has already been opened, it’s fascinating to note that the perp is an illegal alien. (A Canadian not MS13 or anything, but still–here illegally.). He overstayed his visa for something like 14 years.
Nancy Pelosi is of course a big fan of immigrants, and a big enemy of deporting illegal ones. She has made numerous maudlin statements about how wonderful and great illegal immigrants are, and how they enrich American society, and how it’s evil to suggest some might be criminals and, you know, go upside a senior citizen’s head with a ball peen hammer.
Further regarding the political angle here. It appears that the perp (David DePape) is yet another sad example of the epidemic of insane homeless/transient people that infest many American cities, and are a particular curse in the Bay Area. Again courtesy of leftist politicians of whom Nancy Pelosi is an avatar.
I think I remember hearing something a few years back about chickens coming home to roost. Well, here you go.
Also on the political implications of this, it has been revealed that the crack Capitol Police had Pelosi’s home under video surveillance . . . but just happened not to be paying attention when all this went down. Sort of like Epstein’s jailers, I guess.
That, ladies and gentlemen, is government in a nutshell.
So yes, there are many political implications of the Pelosi assault. It just so happens that none of them are the one that Hillary and other Democrats are pushing.
In other words, Republicans are gaslighting Americans to believe–against the evidence of their own eyes–that crime has spiked in the US.
I have to say the Republicans, especially in places like New York, have given no evidence that they are in fact “master manipulators.” The last Republican governor of the Empire State left office 15 years ago. The last Republican senator departed 23 years ago. Eight out of 27 members of the NY Congressional delegation are Republican. Biden won 61 percent of the vote in 2020: Hillary won 59 percent in 2016.
Doesn’t sound like mastery to me!
The New York media–including the national media based there–are reliably left/Democrat. There is only one non-Democrat major media outlet in the state (the NY Post). So how are the Republicans convincing people that they aren’t safe?
In fact, the last major Republican figure in the state–Rudy Giuliani–won because of the last crime epidemic in New York. He was popular because he was instrumental in making New York relatively safe, in comparison with other cities, and in contrast with its recent history.
Kathy Hochul is thus engaged in gaslighting about gaslighting. In her desperation and her palpable panic that New Yorkers will indeed vote with the evidence before their eyes of New York’s crime relapse the only way that she can think of responding is to tell them is that it’s all in their heads, and that it was planted there by the Republicans. The same Republicans that have been political roadkill in New York–especially New York city–for decades.
It’s self-evidently absurd. And it’s hard to think of a more telling admission of the political bankruptcy of the Democratic Party, especially on the issue of crime .
Like so much of Tucker these days, this is an exaggerated, bowdlerized, and politicized description of what is happening. There is a kernel of truth (more on this below) but it is obscured and distorted by the exaggerations.
First off, it is complete bollocks to say “in 25 days there will be no diesel.” Current inventories–stocks–are about equal to 25 days of consumption. But production continues, at a rate of about 4.8 million barrels per week. So, yes, if US refineries stopped producing right now, in 25 days the US would be out of diesel. But this isn’t France! US refineries will keep chugging along, operating close to capacity, supplying the diesel market.
Stocks v. flows, Tucker, stocks v. flows.
Yes, by historical standards, stocks are very low, although there have been other periods when inventories have been almost this low. But low stocks are not a sign of a broken market, or of impending doom.
Low stocks do happen and periodically should happen in a well-functioning market. That is, “stock outs” regularly occur in competitive markets, for good economic reasons.
Assume that stock outs never occurred. Well that would mean that something was produced but never consumed. That makes no economic sense.
The role of inventories is to buffer temporary (i.e., short term) supply and demand shocks. I emphasize temporary because as I show in my book on the economics of storage, storage is driven by scarcity today relative to expected scarcity in the future. A long term demand or supply shock affects current and expected future scarcity in the same way, and hence don’t trigger a storage response. In contrast, a temporary/transient shock (e.g., a refinery outage) affects current vs. future scarcity, and triggers a storage response.
For example, a refinery outage raises current scarcity relative to future scarcity. Drawing down on stocks mitigates this problem. For an opposite example, a temporary demand decline raises future scarcity relative to current scarcity. This can be mitigated by storage–reducing consumption some today in order to raise consumption in the future (when the good is relatively scarce).
To give some perspective on what “short term” means, in my book, I show that for the copper market inventory movements are driven by shocks with a half life of about a month.
Put differently, storage of a commodity (diesel, copper) is like saving for a rainy day. When it rains, you draw down on inventories. When it rains a lot for an extended period, you can draw inventories to very low levels.
And that’s basically what has happened in the diesel market.
Carlson is right about one thing: the Russian invasion in Ukraine precipitated the situation. This is best seen by looking at diesel crack spreads–the difference between the value of a barrel of diesel (measured by the Gulf Coast price) and the value of a barrel of oil (measured by WTI):
Gulf Diesel-WTI Crack
Although the crack was gradually increasing in 2021 (due to the rebound from COVID lockdowns) the spike up corresponds almost precisely with the Russian invasion. After reaching nosebleed levels in late-April, early-May, the crack declined to a still-historically high level and roughly plateaued over the summer, before beginning to widen again in September. This widening is in large part a seasonal phenomenon–heating oil (another middle distillate) demand picks up at that time.
In terms of storage, the initial market response made sense. The war was expected to be of relatively short duration. So draw down on inventories. However, the war has persisted longer than initial expectations, and the policy responses–notably restrictions on Russian exports, including refined products to Europe–have also taken on a semi-permanent cast. So the shock has endured far longer than expected, but the (rational) response of drawing down on stocks has left us in the current situation.
To extend the rainy day example, if you don’t expect it to rain 40 days and 40 nights (or for 9 months) you will draw down on inventories and you’ll go close to zero if the rain lasts longer than expected. That’s what we’ve seen in diesel.
As in any textbook stockout situation, price will adjust to match consumption with productive capacity. Inventories will not buffer subsequent supply and demand shocks, meaning that prices will be pretty volatile: storage dampens volatility.
I should note that low inventory levels can create opportunities for the exercise of market power–manipulations/corners/squeezes. So it is possible that some of the price and spread moves in benchmark prices may reflect more than these tight fundamentals.
Hopefully the hysteria will not trigger idiotic policy responses. The supply shock has been most acute in Europe (because it consumed a lot of Russian middle distillate). This has resulted in a substantial uptick in US exports (diesel and gasoline) to Europe, which has led to suggestions that the US restrict exports, or ban them altogether. This would be beggar–or bugger–thy neighbor, and would actually feed the recent narrative advanced by Manny Macron and others in Europe that the US is exploiting Europe’s energy distress.
Further, this would reduce the returns to refinery capital, reducing the incentive to invest in this sector–which would be a great way of perpetuating the current scarcity.
But this administration, and in particular its (empty) head, somehow think returns to capital are a bad thing:
This is throwing pearls before a swine, but here goes. Investment raises wealth and wages, and lowers prices. People invest only if they expect to earn a return. https://t.co/LjC2zdrlg4
What we are seeing in diesel (and in other energy markets as well) is their efficient operation in the face of extreme supply and demand shocks. You may not like the message that prices and stocks are sending–that fundamental conditions are really tight–but suppressing those signals, or other types of intervention like export bans–will make the situation worse, not better.
And yes, energy market (and commodity market generally) conditions should definitely be considered when evaluating how to handle Russia and the war in Ukraine. But that evaluation is not advanced by hysterical statements about the nation grinding to a halt at Thanksgiving because we’ll be out of diesel.
In an earlier post I said that Putin’s mobilization address was his most unhinged speech ever. That record did not last long: his Friday speech announcing the annexation of four Ukrainian regions was beyond unhinged.
The speech was Castroesque in length. The bulk of it was a jeremiad against the west, and “Anglo-Saxons” in particular. (Apparently he is unaware of American diversity!) He justified his invasion of Ukraine, and the annexations, as a war of survival against a west that is hell bent on subjugating Russia. The speech was a litany of the west’s sins, colonialism and slavery most prominent among them. He conveniently elided over Russia’s imperialism, symbolized today by the disproportionate representation of ethnic groups from Russian republics in those fighting–and dying–in Ukraine, and touted the USSR’s “anti-colonial” record in Africa and elsewhere.
The speech was chock-full of projection, most importantly regarding waging war on civilian populations. There were also the now familiar accusations of Ukrainian Naziism, the betrayal of 1991, and the non-existence of Ukrainian nationhood.
In brief, Putin portrayed the war in Ukraine as an existential conflict waged to defend Russia against Anglo-Saxons attempting to colonize Russia, and to defend the world against such western rapacity. (The reference to the Opium Wars was obviously an attempt to appeal to China, whose ardor for this Ukrainian adventure is obviously waning fast.)
The atmospherics were also bizarre. The images of a dwarfish Putin clasping hands with the hulking mouth breathers leading the sham annexed regions, chanting “Ross-i-ya!” with a demented grin on his face are quite striking–and disturbing. Especially when contrasted to the reality on the ground, where Russian forces continue to reel and rout–the bugout from Izyum being the latest example. “Reservists” are being shoved to the front without even a simulacrum of training, where they will no doubt be slaughtered without changing the battlefield dynamic one iota. Putin is giving no retreat orders and is bossing about formations that have been destroyed or dissolved. Gee, whom does that remind one of?
Tens of thousands of Russian men are fleeing to avoid the press gangs, a visible demonstration of widespread panic. (Kazakhstan–the Russian Canada!) Personal contacts indicate that the panic is widespread even among those who have not fled, but who fear the knock on the door.
The realities of the battlefield and the home front reveal that this is truly an existential conflict–for Putin. He objectively can’t win, but he can’t lose and survive. This creates a tremendous bias towards escalation, with nuclear weapons being his only real escalation option.
There is a considerable debate over whether when push comes to shove Putin will push the button. This is an unanswerable question. Suffice it to say that his Downfall-esque rants in public (one can only imagine what he’s like in private) mean that there is a material probability that he will.
Which poses a grave dilemma to the Anglo-Saxons. (In this respect, Putin is on to something: the continentals are hopelessly ineffectual and along for the ride.) Months ago I wrote that Putin was in zugzwang, i.e., a situation where any move made the situation worse, but one is compelled to move. Well, currently the US is arguably in zugzwang as well. The consequences of letting Putin off the hook or pushing him to the wall are both deeply unsatisfactory.
What is in the US’s opportunity set? The situation on the battlefield does suggest that giving Ukraine a blank weapons check could result in pushing Russia out of most of, and perhaps all, of the occupied portions of the country–including Crimea. But choosing that option is a bet on Putin’s sanity and willingness to go nuclear, and how far up the escalation ladder Putin is willing to go. Conversely, pulling the Ukrainian’s leash will likely result in a continued grinding war with its global and human and economic toll. Brokering a compromise is almost certainly out of the question, given the intransigence of the parties and the completely irreconcilable nature of their demands (though Putin did graciously say that he was willing to accept Ukraine’s capitulation).
The administration is clearly leaning towards–but not completely towards–engineering Russian defeat on the battlefield. Most of the American populace is disengaged. The populist right in the US is engaged but stupidly pro-Russian, because (a) Putin criticized the west’s trans obsession, and (b) the enemy of their enemy (the administration) is their friend. With respect to (a) this is beyond bizarre because these passing references were embedded in a speech that damned the entirety of American history in a way that would make Howard Zinn beam: is the PR buying into that now? (It is also stupid because it validates left narratives about them being Russian puppets.)
The populist right also immediately concluded that the US is responsible for the destruction of the Nord Stream I and II pipelines under the Baltic. The fact is we have no facts, other than that the pipelines suffered catastrophic ruptures, possibly the result of deliberate sabotage. Everything else you read is speculation about motive, which only prove whom the speculators hate most. Those who know ain’t talking, and those talking don’t know.
But again–nobody knows nothing beyond the fact that the pipelines are fucked, so speculation is pointless. And depressingly, given the natures of everyone involved, I can’t say there’s anyone I would trust to reveal the facts.
The populist right is annoying, but largely powerless. Even if the Republicans prevail in the upcoming election, the PR will represent a clamorous but ultimately irrelevant force. Meaning that the US will continue to stumble along, mainly in the direction of pushing an increasingly desperate Putin.
Yes, I can see the upside of that. But I also see considerable downside risk, and indeed the risks are asymmetric. Even as things stand now, beyond nuclear weapons Russia’s military capability has proven even more illusory than a Potemkin village of legend. His conventional threat to Nato is demonstrably non-existent. So the upside to the US and Nato of drubbing Putin further is very limited. But the downside of drubbing him could be serious indeed.
So mutual zugzwang is a not unrealistic description of the current situation.
In an unhinged speech earlier this week, Vladimir Putin (a) threatened (again) to use nukes, and (b) announced the mobilization of 300,000 reservists–although there are reports that the order actually calls for the mobilization of 1 million. This raises the issues of what this means about the state of the war, and the effect that the mobilization will have on it.
The speech speaks volumes about the state of the war. Putin realizes that he is losing, badly, and is desperate to reverse the reverses. He is in essence following Eisenhower’s advice: “Whenever I run into a problem I can’t solve, I always make it bigger. I can never solve it by trying to make it smaller, but if I make it big enough, I can begin to see the outlines of a solution.” Or, as it is often expressed: when a problem appears insoluble, enlarge it.
Putin has two margins on which he can enlarge: nukes and bodies. He’s threatening the former and implementing the latter.
When I say Putin’s speech was unhinged, I do not exaggerate. Look at the videos. He was incandescently angry. His rhetoric recycled the common themes–Nazis, Banderaists–and added twists on his West-directed paranoia by way of rationalizing (although not admitting) the defeats: Ukrainian forces are not just armed by the West, but Nato generals are in command and western troops are in the ranks. The speech was filled with projection about violations of sovereign territory and atrocities. Perhaps it was all for effect–Mad Vlad–to make the nuclear threats more credible. But it seems all too genuine to me.
As for the effect of the mobilization, a quote from Lincoln comes to mind: “Sending armies to McClellan is like shoveling fleas across a barnyard: not half of them get there.” My surmise is that far less than half the fleas that Putin is madly trying to shovel into Ukraine will get there.
If the front line Russian military has proved shambolic on the Ukrainian steppes, the Russian reserve system is beyond shambolic. It was allowed to decay after the collapse of the USSR (which depended on mass mobilization), and the military “reforms” of the last decade only accelerated its decay: the goal of the “reforms” (which were realized more in the promise than the delivery) was to move away from conscription-based forces towards a professional military.
It is therefore best to view what is happening not as a mobilization of an existing reserve force (e.g., the mobilizations seen in August 1914) but as an improvised, hurried mass conscription. Although the initial announcements stated that the mobilization would be targeted at those with combat experience and with specialized military skills, there are reports–all too believable–that the authorities are casting their net far beyond these categories, and that the unfortunates caught up in it are being assigned to units willy-nilly with no regard to their past duties. Tellingly, the dragnet is most intense in the republics: ethnic minorities have already borne the brunt of the war, and Putin wants to shelter metropolitan Russia as much as possible for fear of sparking unrest in the cities.
The existing Russian conscription system is a disaster, rife with evasion and corruption. And that was just to escape the miseries of peacetime service. Both will be far worse when the prospect is being shoveled to Donbas.
No this is not a mobilization. It is press ganging and the yield will be far less than Putin wants.
And what will be the effectiveness those poor fleas who do make it across the barnyard? More bodies will not fix the deep dysfunctions that have been revealed on the battlefield. The high command will still prove to be incompetent. Already poor leadership at the regimental, battalion, company, and platoon level will become even worse as poorly trained and dispirited officers will be put in charge of scared and resentful losers of the conscription lottery. Further, there will be an adverse selection problem: the cleverer and more fit will find ways to escape the net, leaving a disproportionately dimwitted, sociopathic, and addicted rump to fight. More bodies will not fix the paralyzing over-centralization of the Russian command. More bodies will not fix Russia’s disastrous logistics: indeed, trying to supply more bodies will actually exacerbate the logistical problems. More bodies will not fix Russia’s underperforming air forces. More bodies are not the same as more precision guided munitions. Historically Russia has used more bodies successfully when supported by massive artillery, but now ammunition shortages (is another “Shell Crisis” a la 1915 coming?) loom and Ukrainian counterbattery fire has proved devastating thanks to HIMARS and M177s. More bodies will not address Russia’s repeated intelligence failures at the operational or tactical levels. Russian armor has proved extremely vulnerable, but the more bodies will deploy in older and even less well-maintained AFVs.
In sum, more bodies cannot and will not fix the real reasons for Russian battlefield disasters. They will just be more victims for these reasons.
There is also the issue of how the new bodies will be deployed: as replacements or in entire units. The time involved in standing up new units is considerable, even if rushed. Putin is in a hurry, so I conjecture that the unfortunates swept up by the press ganskis will receive lick-and-a-promise “training” of a few weeks (after all, they are veterans, right?, so they just need a refresher course!) and be shoveled to the front and shoved into shattered units. If you look at say the American army in WWII, you’ll find that the life expectancy of replacements is often measured in hours or a few days. (Experienced infantrymen often avoided learning the names of replacements, because it was pointless.) That will happen here as well.
Historically, Russia relied on a huge demographic advantage vis a vis its foes in a quantity-over-quality approach. But even when Russia did have a demographic advantage, the results were often disastrous: cf. the Russo-Japanese War, and Tannenberg and other WWI battles. Now a demographically devastated Russia is falling back on old formulae. To call it tragic is an understatement.
In sum, more cannon fodder without more cannon (and logistics, and leadership, and on and on) to support them will result in a bloody disaster. But it will allow Putin to defer deciding whether to resort to his only other option: nukes.
It is also important to consider how Putin’s adversaries–not just Ukraine, but the US and the rest of Nato–will respond. The prospect of facing greater numbers (even of a low quality) incentivizes Ukraine to accelerate its offensives and press its advantages, even though that will entail larger losses. If successful, that would in turn accelerate when Putin has to decide whether to back down or resort to his only remaining way of expanding the problem. Ukraine will redouble its already frenzied efforts to lobby western governments for more weapons.
The US and Nato need to turn their attention from what is happening on the battlefield to focus intensely on forestalling Putin concluding that it’s nukes or nothing. Sadly, that means hoping that Putin’s more bodies measure will extend the stalemate, thereby buying time for some diplomatic resolution.
Alas, the US and its allies appear set on Ukrainian victory on the battlefield and on the humiliation of Putin, rather than on securing an unsatisfying and messy diplomatic compromise. That is gambling with millions of lives–and perhaps many more.
Which means that where things go may hinge crucially on the Russian popular reaction to Putin’s desperate measure. It is optimistic in the extreme to believe that the mobilization will spur a 1905 or February 1917 or August 1991 moment in Russia. And it is equally optimistic to believe that if such a moment indeed occurs, that it will not result in Putin’s replacement with someone even worse.
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.
I don’t have much to add to all that has been said about Gibbering Joe’s jeremiad against traditional Americans who want to make the country great. The projection. The vicious partisanship in a speech billed as non-political. The excommunication of vast swathes of Americans from polite political society. The bizarre, lurid backdrop. (NB. Claims that you are fighting for the soul of the nation take on a very different meaning when presented in Satanic lighting.) The Marines standing praetorian like behind the would-be emperor. (Thereby emphasizing his threat from earlier in the week to unleash the US military against those who dare challenge his regime.)
The location was particularly disturbing, and sickly ironic. Independence Hall is where the members of the Continental Congress promulgated a Declaration predicated on a belief in natural rights–including the right to resist and replace despotic government:
That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.
You may or may not believe that the current US government has engaged in a “long train of abuses and usurpations” sufficient to justify the people exercising their right “to alter or abolish it,” but if you don’t, make that case on the merits, rather than relying on invocations of F-15s and Marines to assert that might makes right. Independence Hall is also Constitution Hall, of course, and it is also ironic that Biden’s first bill of particulars against MAGA supporters is that they do not recognize a right not explicitly in the Constitution (that to abortion), but that he also declaims repeatedly and viciously and ridiculously against one that is (the right to bear arms). Or that he repeatedly resorts to anti-Constitutional measures (e.g., college loan forgiveness via executive ukase) to advance his agenda.
In other words, Biden adamantly advanced a totalist progressive agenda on the site of the creation of documents (the Declaration and the Constitution) that progressives loathe. (Cf., Woodrow Wilson et al.)
Biden anathematized people who, to the extent they have a common foundational political belief, it is grounded in the Founding on the site of the Founding. He claimed the mantle of the Founders while asserting that the only acceptable political beliefs are progressive (i.e., anti-Founder) ones.
The speech was a shocking one. Arguably the most shocking every delivered by an American president: even many (or course not all) leftists/progressives were disturbed. So why did he give it?
Well, for one thing because he believes it. Or, at least, the forces for whom he is the front man, the skin suit, believe it. (Hey! Obama! We see your lips move!)
That’s neither a necessary nor sufficient condition though: unlike Humpty Dumpty, politicians don’t always say what they mean and mean what they say.
The obvious (though denied) political nature of the speech provides the explanation. Of course it is red meat thrown to his faction/party to energize them for the coming midterms. But I don’t think that’s the main objective here, or the main audience.
Instead, I view his speech as an attempt to induce preference falsification in the mushy middle. People who might otherwise be sympathetic to the anti-progressive cause, but who don’t want to be seen as revolutionaries and knuckle draggers, who don’t want to be ostracized by the anointed who dominate the commanding heights of politics, media, and education. People who are afraid that taking an anti-progressive stand will result in cancelation, social death–or worse (e.g., the tender mercies of the IRS or federal “law enforcement”).
That is, the speech was not intended to persuade anyone: it was intended to intimidate those are not already progressive into acquiescing and submitting.
To work in protecting a regime, preference falsification only requires that people do not oppose it publicly, not that they support it openly. The more people who go along, and remain silent, the more other people will infer that the regime actually has broad support.
To me, therefore, the seemingly over the top nature of Biden’s speech–including the crimson atmospherics and the violent rhetoric–is no accident, comrades. It was a tried and true method widely employed by authoritarian figures and regimes to cow the meek into avoiding outright opposition that if it becomes known, creates a feedback loop that causes the regime to crash.
And I guess that is something of a silver lining peering through the red light. Confident regimes do not resort to such measures. Insecure ones do.
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.
