Streetwise Professor

On Thursday, the CFTC voted along party lines to approve a proposal on position limits. The party line vote reveals a salient fact: the proposal represents a virtual abandonment of the Commission’s earlier proposals (2011, 2013, 2016). Indeed, virtually all of the features that I criticized in the earlier proposals are gone, and the current proposal largely mirrors the recommendations of the Energy and Environmental Markets Advisory Committee that I served on (before being uninvited by current EEMAC chair Dan Berkovitz). (More on EEMAC below.)

Most importantly, limits outside the “spot month” (which is actually just a few days for some commodities) for energy and metals commodities are gone. Good riddance. They remain for nine legacy ag futures contracts (corn, cotton, and the like), but the any-and-all limits have been expanded substantially.

The rule expands hedging exemptions beyond the prior proposals, and in doing so meets the objections of companies like Vitol. Interestingly, the proposal tidies up the definition of a “bona fide hedge” and makes explicit, rather than implicit, the principle that bona fide hedges are solely for the reduction of price risk.

The Commission did eliminate the “risk management” hedging exemption for swaps dealers, based on an interpretation of Congressional intent and a reading of statute that limits hedging to the management of risk of physical commodity positions. On principled grounds, I object to this. A swap dealer buying an oil swap from an E&P firm facilitates the hedging of a physical position, and hedging that swap via the futures markets serves a classical risk transfer function. A dealer selling an index swap to a pension fund isn’t hedging a physical risk, but it is still serving a risk transfer function and the distinction between physical commodity hedges and non-physical hedges is rather Talmudic.

The practical effect is unknown. In terms of index swaps, most swap dealers are out of the nearby contract when an index (e.g., GSCI) rolls, which is well before the spot month for energy and metals that make up the bulk of most indices. Hedges of the ag portion of these swaps could be affected by the any-and-all limits and the elimination of the risk management exemption, but the dramatic increase in the size of these limits may well greatly reduce any impact. A dealer hedging a swap with payments based on final settlement prices of say NYMEX crude or natural gas could be impacted by the elimination of the exemption, but the spot month limits may be large enough to cushion the impact here as well.

The most interesting feature of the proposal is its rather tortured attempt to address the “necessity” issue that derailed previous proposals in court.

The most important aspect of this is that it appears that the Commission has essentially conceded that a necessity finding is, well, necessary. That raises the issue of the criteria for establishing necessity.

One criterion could be that a limit is necessary only if the risk of speculation causing unwarranted price fluctuations is sufficiently great.

An alternative criterion is that a limit is necessary as long as the risk of unwarranted price fluctuations exists at all, if the contract is important enough.

The Commission took the latter approach, and limited its limits to commodities it deemed were sufficiently important (measured by volume and open interest) so that any unwarranted price fluctuation could lead to impairment of price discovery and risk transfer on a large scale. The closest that the Commission came to taking likelihood of disruption into account is its restriction of the limits to physical delivery contracts that could be cornered or squeezed. This is a logical problem (cash-settled contracts give rise to manipulation too) but this is of secondary importance. But it could be read to limit the Commission’s interpretation as to the source of unwarranted fluctuations to market power manipulation, which would be a good limitation indeed.

A sufficient statistic to infer that the Commission conceded much in its necessity finding is Dan Berkovitz’s freak out on the issue in his dissent.

As a manipulation-related aside, I will note that the spot month limits are justified by the notion that a position in excess of deliverable supply is necessary to execute a market power manipulation (i.e., a corner or squeeze). I have some recent research (which I’ll post and write about soon) showing that this may be a sufficient condition, but not a necessary one. Meaning that the limits will not be sufficient to eliminate market power manipulation.

The recent proposal, assuming it is finally approved as a rule in something resembling its current form, represents the end of a saga that has had a major influence on my life. I began writing about the speculation issue when it became a source of renewed political controversy in 2006. I wrote my first major post in response to a Senate Permanent Subcommittee Report (large authored by Dan Berkovitz) on oil speculation in August 2006.

As oil prices spiraled upwards in 2007 and 2008, I wrote more about the issue, and gained more notoriety. This resulted in my testifying before the House Ag Committee in July 2008 (a day or two before oil prices reached their all time high) and led to a WSJ oped.

Then the Financial Crisis happened, and I focused more on clearing issues, with periodic forays into the speculation debate. But Frankendodd included a provision on speculative position limits in commodities, and the CFTC rolled out a proposal in 2011.

I wrote a comment letter on the proposal. That letter (and others I wrote subsequently) were sufficiently important that in the final rulemaking and in later proposals it or other things I’ve written were cited dozens of times (my name gets 50 hits in the 2016 proposal).

But the impact of the letter on my life went beyond that. Gene Scalia–son of Justice Antonin Scalia, and now Secretary of Labor–retained me to write a declaration criticizing the inadequate cost-benefit analysis in the proposal (it being something required under the law.)

Perhaps most importantly, Blythe Masters at J. P. Morgan liked it, and called to tell me so. She then proposed that I write an analysis of the systemic risk of commodity trading firms for SIFMA. I did–and came up with the wrong answer. So SIFMA spiked the report. But word leaked out, which prompted Trafigura to retain me to write a study (with a subsequent follow-on study) of the economics of commodity trading firms.

I don’t think I’m exaggerating to say that this study proved to be very influential, perhaps because of the lack of competition: writing on the sector was, and remains, very sparse. I have traveled, lectured, and taught around the world based on people wanting to hear what I wrote about in that piece.

The study was also the hook for the New York Times hit piece on me in December, 2013. See! I took money from evil speculators while writing in opposition to limits on speculation! Never mind that I had been consistently opposed to limits years before, and never mind that Trafigura (and other oil traders) are not speculators and use the futures markets mainly for hedging.

(As an aside, I am convinced, but cannot prove, that Gary Gensler was the moving force behind the piece. After all, why else would the NYT devote front page space to an obscure academic? And under the theory of there-are-no-coincidences-comrade, comments on the 2013 revised proposal were due in January, 2014. So December 2013 was the perfect time to kneecap a gadfly. By the way, Gary, how’s that gig as Treasury Secretary working out. Oh. Right. Well maybe you can chair Hillary’s legal defense fund.)

Asides aside, other than frightening my aged parents this article actually was all for the good. It validated me as an influential voice. It also got many very reputable people to rush to my defense, including Thomas Sowell, one of my long-time heroes.

The article raised its head a few years later when I was serving on EEMAC, and was asked to write the (Frankendodd-mandated) report on the committee’s deliberations. I was the dutiful scribe, and honestly recorded the committee’s adamant opposition to the then-outstanding proposal (which included all the bad features jettisoned in the new proposal).

This caused Elizabeth Warren to lose her [insert vulgar metaphor of your choosing here]. This article in particular cracked me up (and still cracks me up): Why Elizabeth Warren Is On the Warpath This Week.

Well, why was she on “the warpath”? Well–me, now that you ask:

The committee, which was established by Dodd-Frank, has nine members. Though it is supposed to express a “wide diversity of opinion” and “a broad spectrum of interests,” eight of the nine members represent companies or industries with a financial interest in killing the position limits rule, or have a personal financial interest themselves. 

. . . .

The recent inclusion of Craig Pirrong on the committee is perhaps the most flagrant example. Pirrong, who co-wrote the first draft of the report with James Allison, is a professor of finance at the University of Houston, who has been paid by several industry participants and trade groups for his research into commodity speculation. He was also a paid research consultant for the International Swaps and Derivatives Association, the very group that got the initial rule overturned by the courts.

The CFTC report relies mostly on Pirrong’s research and a presentation he made to the committee last year, which did not include the opinion of anyone who believes in the dangers of excessive commodity speculation. In fact, 10 of the 13 witnesses at EEMAC meetings came from industry, two were representatives of CFTC, and the other was Pirrong. The meetings never mentioned that there would even be a final report. [Er, it’s in the law, you knobs.]

As Public Citizen’s Tyson Slocum, the only non-industry committee member and the only one to dissent from the recommendation, points out, Pirrong was not on the committee until after he co-authored the report. Pirrong “is so new to the EEMAC,” Slocum wrote in a minority dissent, “that I only learned he was a member when he was listed as a co-author.” 

This kerfuffle warranted another mention in the NYT, and I’ve been told that Warren used it (and me) in a fundraising pitch.

I’m so proud. One’s enemies are the best comment on one’s character.

What cracks me up is that it wasn’t a right-wing snarkmeister like me that included “Warpath” in the title of an article about Liz Warren. It was the (by then) far-left New Republic. Freudian slip? Whatever, it’s hilarious.

Alas, understandably but not commendably, Commissioner and EEMAC chair Christopher Giancarlo buckled under the political pressure and withdrew the report. But this was almost certainly a non-event: the proposal was dead in the water, and was only salvaged by saving major pieces overboard. And I’ve sailed on.

What a long strange trip it’s been. The speculation debate has had a first-order impact on the arc of my life for more than a decade. Although the Commission proposal will likely put an end to one chapter of that debate, as I wrote in my first piece in 2006, speculation controversy is a hardy perennial, and will no doubt recur the next time some major commodity price spikes or craters. And maybe I’ll be around to draw more fire–and deliver some–when that happens. And until then, I’ll keep Truckin’ on whatever fits my fancy.

Nota bene: I’m not a Dead Head by any means. But if the song fits . . . Well, not the drugs part!

If you thought the Trump-Putin narrative was put out of our misery by Robert Mueller’s drooling performance back in May, you’d be wrong. The Democrats try to resuscitate it daily: one of Nancy Pelosi’s mantras is “all roads lead to Putin.”

Adam Schiff and Gerald Nadler brought up Russia repeatedly in their drone strike of an impeachment presentation before the Senate. And by drone strike, I don’t mean something explosive, like blowing up Soleimani: I mean they droned on and on and on.

Schiff demonstrated just how little he and his ilk actually know about Russia and Putin. Schiff drew laughs when he said Trump had made a religious man out of Putin:

“‘Thank God,’ Putin said, ‘Thank God nobody is accusing us anymore of interfering in U.S. elections, now they’re accusing Ukraine,’” Schiff said.

One may question the sincerity of Putin’s public religious displays, but one cannot dispute that he has repeatedly and consistently expressed religious sentiments, utilized religious symbolism, and has attempted to increase the role of the Russian Orthodox Church in Russian life. All long before Donald Trump was even a candidate. But apparently Schiff and the idiots who laughed with him (rather than at him) have a mental image of Putin as a godless commie. But we’re supposed to take their alarums about Trump and Putin seriously.

This continuing attempt to bring the Trump-is-Putin’s-puppet narrative back to life is utterly futile. They would have better luck giving CPR to King Tut’s mummy.

It is futile because it is completely untethered from reality. Trump administration policy towards Russia has been as harsh, or harsher, than Obama administration policy (even after the farcical “Reset”). Nordstream II is one example. Perhaps the best example is the suffocating sanctions that have been imposed on some of Putin’s inner circle and closest friends.

My friend Ivan Tkachev, a journalist at RBC, has been writing about the sanctions issue. This recent piece looks at the implications of the Finnish court decision against one of Putin’s closest friends, his judo buddy Boris Rotenberg.

If you aren’t familiar with it, RBC is one of the last–if not the last–major independent news outlets in Russia. It is definitely not a Kremlin organ, or a monkey to an organ grinding Putin. Putin tolerates it, as many canny authoritarians do, because he wants information that comes from outside the echo chamber. RBC is supposedly at the top of Putin’s reading pile every morning.

As an illustration of Ivan’s independence–and courage–he put idiotic western journalists (who swallowed the Sechin/Rosneft/Putin line) to shame in his coverage of the farcical Rosneft “privatization.” (I made a modest contribution to Ivan’s reporting, but I did it from the safety of Houston–not Moscow.)

So Ivan is not one to carry the Kremlin’s water, or that of oligarchs like Rotenberg, by exaggerating or distorting the severity of the Trump Treasury Department’s sanctions. Read the article, and you see that this sanctions regime places a heavy boot on the windpipe of people like Rotenberg, Deripaska, and Viktor Vekselberg:

2. It turns out that Russian oligarchs blacklisted under the US sanctions regime are cut off from the entire Western financial system, not just the American one. There are many examples of this ‘toxic’ extraterritorial effect of US secondary sanctions. For instance, Vekselberg’s and Oleg Deripaska’s frozen bank accounts in Cyprus; frozen dividends on Bank of Cyprus shares owned by Vekselberg; forced sales of private jets by the Rotenberg brothers and Deripaska. If we take into account that Chinese banks (despite the mythologised Russian-Chinese friendship) are extremely cautious about working with blacklisted Russians (as representatives of Russia’s Central Bank admitted in late 2018), it turns out that Russian oligarchs blacklisted under US sanctions are isolated from virtually the entire global financial system.

3. Moreover, the risk of secondary sanctions does not depend on the currency in which payments to or from SDNs are made; in the context of primary sanctions US dollar payments are a decisive factor, but secondary sanctions can be imposed regardless of the currency. In the case of Rotenberg, attempts were made to transfer payments in euros but the banks refused to execute the transactions.

The gravamen of the article is that banks around the world–even Chinese ones–are petrified by the scourge of secondary sanctions. If you want to do business in the US, or in dollars with anyone, you will not deal with anyone on the sanctions list in dollars–or in dinars or bolivars or . . . in bubblegum cards or wampum.

Indeed, although the sanctions formally restrict only “significant” transactions with those under ban, what counts as “significant” is in the eye of the US Treasury. The risks to a bank are so great that it’s wiser to engage in no transaction at all–even something as trivial as processing payment of a Rotenberg’s electric or trash bills.

Just as one may question the sincerity of Putin’s religiosity, one may question whether this administration’s sanctions on prominent Russians close to Putin reflect Trump’s sincere beliefs. But one cannot question that these sanctions exist, and are extremely punishing to the Putinites that they target.

But people like Pelosi and Schiff don’t even question: they pretend that they don’t exist. And this demonstrates that there is no doubt whatsoever about their insincerity, and fundamental dishonesty.

Yesterday, Vladimir Putin (to whom, of course, all roads lead–just ask Nancy) proposed (which is equivalent to announcing) major changes to the Russian constitution. The most important element of his plan is a reduction in the powers of the presidency that has so assiduously built up over the past decades.

This is of course due to the fact that Putin is barred from another term in office, and resorting to some dodge like the “castling” maneuver that made the hapless Dmitry Medvedev president for a term would be too problematic even for Putin. So he is basically saying: “If I can’t be president, no one will be.”

This is not to say that Putin is going away, of course: far from it. He is basically playing a divide-to-rule strategy. The plan splits up the president’s powers, assigning some to the Duma and likely others to the heretofore advisory State Council. Furthermore, he imposes constraints on who can become president, eliminating anyone who has lived abroad in the last 20 years or holds dual citizenship. Since this group includes a wide swath of the Russian elite, the plan culls the heard of potential serious challengers to him, challengers who would likely attempt to reassemble the powers of the presidency were they to assume it.

This fragmentation of power plays perfectly to Putin’s strengths. Even in the current system his primary role, and source of power, is managing contending clans within the Russian elite. He is the balancer, the mediator. The mafia don ruling over squabbling mafiosi.

Fragmenting power actually increases the demand for mediation services. Under his plan, he will remain the essential man, and indeed become even more essential because under it there will be more disputes and more disputants.

So Pelosi’s phrase is apt, though her application to Trump is not: in Russia, all roads lead to Putin, and this new plan is designed explicitly to keep it that way.

Perhaps the diminution of his formal powers will impede his effectiveness as a mediator. But maybe not: a strong case can be made that he’s not a successful balancer because he’s president, but he’s president because he’s a successful balancer. The need for someone to play that role, and his unchallenged effectiveness in playing it, will remain. The formal appurtenances are of secondary importance.

In other words–no surprise here–Putin is designing a system that will perpetuate his role in a highly personalized, de-institutionalized political system.

Many Russians will no doubt breathe a sigh of relief, as this reduces the uncertainty surrounding his leaving the presidency in 2024. But their relief is only temporary, as this merely kicks the can down the road, and as we know, roads in Russia are horrible.

That is, this plan only defers answering the question: who replaces Putin? Maybe this maintains stability while he is alive–and sentient–but his life will end, and his physical and mental powers are likely to decline substantially before that time. What then?

The post-Putin transition was almost guaranteed to be a chaotic and vicious power struggle because of the highly personalized and de-institutionalized nature of the system he created. If anything, his proposed alternative is even more personalized and de-institutionalized because he will play the same functional role, but in an even less formalized structure. This, combined with the creation of new fiefdoms (e.g., by empowering the Duma) is likely to make the succession struggle even more fraught.

As the old commercial said: you can pay me now, or pay me later–with the implication that paying later will be far more expensive. So it will be in Russia, as in oil filters.

Totalitarian regimes are acutely aware of the old adage: “there’s strength in numbers.” What they fear most is mass protest on a scale that can only be repressed with draconian brutality that further undermines whatever internal and external legitimacy they have.

The biggest problem that those who oppose such a regime face is coordinating such a mass protest. Who wants to be the first to step out, uncertain of how many will follow?

This is why such regimes devote considerable resources to impeding coordination. The measures they adopt include propaganda, which supports preference falsification and spreads doubt among individuals about how widely their dissatisfaction is shared. Another is brutal repression: cracking down hard on those who rise up even without universal support, pour encourager–ou, réellement–pour discourager les autres.

We have seen both of late in Iran. The organized mass funerals and mass displays of public bereavement for Suleimani is an example of propaganda at work. The (ironically, Suleimani-directed) brutal repression of anti-regime protests over fuel price hikes is another.

But sometimes chance events create a rallying point that overcomes the coordination problem. Something that is so universally reviled among the public, and which everyone in the public knows that everyone else reviles, can coordinate the spontaneous mass resistance that totalitarian leaders dread.

We may be seeing that in Iran this very moment. The admission–mere hours after statements saying that it was an impossibility–that the IRGC had shot down a civilian airliner, killing 176 people, has catalyzed mass protest in Iran. Among the chants: “Soleimani was a murderer, his Leader is too.” And “Reza Shah, Reza Shah, Rest In Peace!” And, most ominously for the regime: “Don’t be afraid, don’t be afraid, we are all in this together.”

The shoot-down encapsulates the incompetence, brutality, and lies of the regime. It is out there for all to see, inside and outside Iran. It is exactly the kind of event that is most likely to unify discontented Iranians, and to overcome the coordination problem.

By the nature of such social phenomena, there is a positive feedback mechanism. If enough people rise up, that encourages even more to do so. It is precisely this feedback mechanism that leads totalitarian regimes to devote inordinate efforts to prevent it from starting. But sometimes chance–or a moment of cosmic incompetence and brutality that everyone can witness–overwhelms those efforts.

It is too early to see whether the grotesque murder of 176 people will culminate in the fall of the mullahs. But is the kind of thing that is most likely to do so. An act that all can witness. An act that implicates the regime. An act that evokes universal revulsion. No one has any doubt that most Iranians are shocked by what happened.

These events bring moments of truth to totalitarian regimes. Do they have the will to exert the force necessary to crush them, when the world is watching? Totalitarian regimes that survive do. Those that don’t, don’t. The jury is out on the mullahs.

They enter this crisis without their most reliable enforcer, who was just incinerated by the United States, which touched off the string of events that are climaxing in the streets of Iran. That changes the odds considerably.

This demonstrates the contingency of history, and the law of unintended consequences. Most of the criticism of Trump’s decision that has focused on unintended consequences has emphasized bad potential outcomes. But this string of contingent events shows that unintended consequences can lead to pleasant surprises too.

We shall see.

One last comment. The events in Iran demonstrate, as if further demonstration is needed, the fatuity of the American media. We have witnessed more than a week of fawning over Suleimani, with an emphasis on how universally beloved and revered he is.

Apparently, not so much.

https://twitter.com/HeshmatAlavi/status/1216106866406760449

Will the American media admit error? I don’t know about where events in Iran will lead but I do know the answer to this question: Never.

Where’s my World War III? I was promised a World War III!

As for indicators that the fact that the US blowed up Qassem Suleimani real good will not set off WWIII, or even Middle East Regional War MCCCLV, look at the oil price: it’s lower today than when Gen. Suleimani’s bell tolled.

The vaunted Iranian retaliation was of the “we have to do something but please don’t hurt me anymore” variety: they launched a few missiles towards bases in Iraq, and fewer still landed there, and those few that landed did not even inflict a scratch on an American.

This allowed Trump to act magnanimously. And limit his response to imposing more sanctions.

That is, the Dirty Harry equilibrium appears to be playing out. A rational thug put his hand on the gun, looked into the muzzle of a 44 magnum, and thought the better of it. Expectations have been reset. Deterrence has been revitalized.

“It is better to be feared than loved, when one cannot be both.” There is no way in hell the mullahs will ever love us: so fear it has to be.

There is other evidence that the mullahs and their security forces were petrified at the prospect of a robust US counterstrike–tragic evidence. It appears increasingly likely that a Ukrainian 737 that went down about the time Iran shot off its missiles was shot down by the Iranians. Interested parties–the US (though not yet officially), Ukraine, and Canada (which had many nationals on board)–have said it was highly likely that was indeed the case. Occam’s Razor says the same: the likelihood of a relatively new 737 spontaneously catching fire and crashing with no communication from the pilots is small indeed.

Shooting down a civilian airliner betrays an extremely jumpy–i.e., afraid–Iranian military that was dreading a US strike. It is horrible outcome–but one that rests entirely on the mullahs.

But not in the minds of many of the American “elite.” Apparently a memo went out dictating that talking heads assert that the plane was the victim of “crossfire,” and that the US generally, and Trump specifically, was to blame.

Representative of this regurgitation of the crossfire talking point was Susan Hennessey, well-known member of Lawfare, and hence a polyp in the colon of “The Resistance” and the deep state:

https://twitter.com/Susan_Hennessey/status/1215364827599790082

Hennessey received much push-back on her “crossfire” remark (as apparently did NBC journalist Heidi Przybyla, who cravenly deleted her tweet), and she felt compelled to respond, pissily:

https://twitter.com/Susan_Hennessey/status/1215384732688683017

Susie brings to mind Humpty Dumpty: “When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less. ” To non-Humptys, the word “crossfire” requires, you know, at least two people shooting. There was only one party shooting (evidently) in Iran. That being Iran. The US fired nary a shot after Senor Suleimani bit the dust.

Insofar as this was a consequence of Trump’s decision to respond to Suleimani’s extremely long history of terror–a history he reveled in–and the threat of terror to come, that is also squarely on the mullahs. They acted as if there were no consequences that they weren’t prepared to accept. Then there were. And then they panicked, and killed a further 176 people.

But everything must be blamed on Trump. Everything.

Along these lines, the media keeps slobbering over Suleimani, telling us how universally revered he is in Iran (while ignoring the other places in the Middle East where he is hated), and speaking in awed tones about the crowd at his funeral.

Arguendo, let’s assume that he is/was universally venerated in Iran. That is, a man who avowedly hated the United States, and ceaselessly waged war on it, and panted for its destruction (and that of Israel). What would that say about Iranians, and their attitude to the US?

Is that really the mullaphiles want to convey? Or are they just too stupid to grasp the implications of their idolatry?

The obliteration of Qassem Suleimani has done a great public service, if only for demonstrating the extreme levels of mental retardation among the so-called “elite.”

ZOMG! This will start WWIII.

Which is an extreme dumbing down of the concept of WWIII, which formerly was used to refer to a conflict between two powers possessing tens of thousands of nuclear warheads, and alliances encompassing dozens of nations. Iran has no nukes, and no allies. So other than that–totes the same!

A corollary stupidity is: ZOMG! They will reintroduce the draft! (Note that the Selective Service website crashed because of queries prompted by Gen. Suleimani’s impromptu car-b-que.)

ZOMG! Iranians are in the streets, chanting “Death to America!”

Which they’ve been doing for 40 effing years.

ZOMG! The Iranians will retaliate with terrorism!

Which they’ve also been doing for 40 effing years.

And let’s apply a little game theory. The equilibrium prevailing prior to January 2 could be characterized as the Chump Equilibrium. The Iranian leadership, Suleimani most notably, clearly believed that they could engage in a significant level of asymmetric warfare against the US without fear of serious retaliation or escalation from the US. The best evidence of this is the brazenness with which Suleimani operated.

Iranian beliefs were fully consistent with past American behavior. This explains their escalation in Iraq and elsewhere.

But then Trump demonstrates conclusively that the old beliefs are incorrect by smoking Suleimani. Whereas before, the mullahs and their military and paramilitary henchmen could operate on the belief that the US would not target their sorry selves, they now have to assign a considerable probability to the possibility that if they take American lives, they will pay a very personal cost.

So we have transitioned to the Dirty Harry Equilibrium: “Do you feel lucky? Well, do ya, punk?”

In the original Dirty Harry, the rational thug backed off: the crazy thug didn’t, and took a 44 magnum round to the chest.

We will now see whether the mullahs are rational thugs, or crazy ones. Personally, it doesn’t really matter to me. Or to reprise another Dirty Harry trope: “Go ahead. Make my day.”

The Iranians will certainly “play” crazy, in the hope of buffaloing the Euroweenies and the bedwetters in the US. Here, the very fact that said Euroweenies and bedwetters are virulently anti-Trump means this is another losing tactic, for this means that Trump DGAFF what they think or what they say.

So my prediction is that the intensity of Iranian asymmetric warfare will decrease, not increase.

There is other evidence that Trump has totally upended the mullah’s calculations. They are suffocating under the sanctions that Trump has imposed, and have engaged in various provocations (shooting down a US drone, attacking Gulf shipping and Saudi oil installations), almost certainly in the hope of provoking a response (e.g., a bombing campaign against Iran) that would that would rally world opinion behind Iran, eventually leading to the lifting of sanctions.

But Trump didn’t fall for that. Instead, he made a completely unexpected play greatly raised the dangers the mullahs face, and which did not create the innocent victims that the mullahs were hoping to exploit to undo the sanctions regime that is throttling them.

Not that the retarded elites in the US, and the West generally, have not done their level best to make Suleimani look like an innocent victim. The slobbering and blubbering over this evil thug in the media precincts, and the Democratic Party (same diff, I know) is a sight to behold.

Which will also redound to Trump’s benefit, as the Americans the Democrats need to persuade will be revolted by their eulogizing and lionizing someone who has waged war against the US for his entire adult life, and who reveled in killing and maiming Americans.

If anything, the idiocy is metastasizing, rather than abating. Today the media seized on an alleged letter from a US brigadier general to some Iraqi military figure, supposedly stating that the US was preparing to withdraw from Iraq.

Why would anyone take this seriously, or without a Siberian salt mine? Consider the problems:

1. The letter was not signed.
2. Does anyone with two synapses to rub together believe that such a major decision would be communicated first by an Army BG, rather than by the President, the Secretary of State, or the Secretary of Defense? FFS, there are BGs who serve coffee in Pentagon meetings.
3. What is the likelihood that this represented US policy a mere hours after the cause of yesterday’s media freakout: Trump’s tweets saying that the US would not leave Iraq until they paid billions for the bases we built, and if they tried to force the US out, we would impose sanctions that would make those imposed on Iran “look somewhat tame by comparison”?

The story is now that this was a draft of a letter regarding redeployments within Iraq, and was sent without authorization–or a signature! Maybe–or maybe it is part of some accidentally-on-purpose psyop. It definitely psyched out the media.

But regardless, rather than expressing skepticism, the media ran with it, breathlessly–and brainlessly. (And maybe that was the point of the psyop–to demonstrate just how retarded the media is.)

Nigerian princes should focus their email scams on journalists. They’ll believe anything, apparently.

Another story making the rounds (courtesy of the NYT–you’ve been warned) is that, based on anonymous sources (I’m sure you’re shocked) the US military presented Trump with many options, and included whacking Suleimani as the extreme option, expecting Trump to choose the middle door instead. They were shocked, shocked!, that Trump went for the extreme.

Remember: there are loads of Obama-appointed people embedded throughout the government, including at high levels of the armed forces. Take every leak with a huge degree of skepticism.

And of course there is a counter narrative, 180 degrees from the NYT version. The WaPo states that Pompeo had been pushing to kill Suleimani for months, and that it took considerable persuasion, and the removal of numerous Pentagon officials, to get Trump to agree.

So take your choice. But discount both.

The fact is that Suleimani is dead, and that as a result the mullahs have to think seriously that Lockheed Martin or Boeing is putting the finishing touches on a toy with their name on it. All of the rest is sound and fury, signifying nothing. Or less than nothing.

If reality mirrors Beetlejuice, wherein you spend eternity in the condition in which you left this mortal coil, sometime last night a cloud of pink mist reeking of RDX and rocket fuel wafted through hell, that being all that was left of Islamic Revolutionary Guard Force commander Qassem Suleimani after an aptly named Hellfire missile interrupted his trip from the Baghdad Airport. I’d say rest in pieces, but I don’t think there are any.

I asked an Iranian friend what he thought. Beyond being giddy (for pace the WaPo, not every Iranian “revered” the thug or hates Trump), he related that he had been reading the “regime media,” and that it was in a state of “absolute shock.”

As well it might. Suleimani was no doubt shocked, or would have been in the instant before Hellfire lived up to its name. He obviously thought he was untouchable, shuttling between Iran, Iraq, Syria, and Lebanon, frequently appearing in public, and pretty much living the life of a terrorist rockstar who never dreamed that Great Satan (or even Little Satan) would attack him personally.

And perhaps that sense of impunity was understandable. The Bush and Obama administrations blamed him personally for hundreds of American deaths–and did nothing. They restrained the Israelis from snuffing him.

And Trump did nothing after Iran shot down an American drone. Or after attacks on Gulf shipping. Or after an attack on the most important Saudi oil installation.

Complacency is quite understandable, therefore.

So what changed? Well, in fact Trump made this abundantly clear, and did so on Twitter of course. Under Suleimani’s direction, Iraqi militias killed an American, launched an attack on sovereign US territory (its embassy in Baghdad) and was apparently planning additional attacks on American. Trump said if you kill Americans, you will pay. And he said that wasn’t a warning, it was a threat.

Khameini retorted “you can do nothing.” And Trump replied: “Really? Hold my Diet Coke.”

Trump’s red line is clear as day: Iran kills Americans, and he will kill those responsible. A return to the “Pedicaris alive or Raisuli dead” model of foreign policy, but expressed via Twitter rather than the telegraph. And using Hellfires and JDAMs rather than the Marines or gunboats.

The conventional wisdom set is of course in a state of apoplexy. Despite the fact that Suleimani gleefully directed the deaths and maiming of hundreds of Americans, the media and Democratic politicians engaged in a frenzy of but tweeting; “Yeah, he was horrible, but . . . ” Hell, some skipped over the horrible part altogether and made the guy sound like some sort of paragon.

The most comment lament–shriek would be more accurate–is that this will cause a massive retaliatory response from Iran. Really? These people remind me of the See-and-Say Barbie my daughters used to play with: pull the string, and they say the same damn thing over and over.

The Iranians will no doubt compelled to do something, but Trump has obviously completely upended their assumptions about American responses to their actions. They killed one American contractor, threaten our embassy, and we take out their most important operational figure.

The Iranians, unlike the bleating conventional wisdom complex, understand escalation dominance. The American capacity to escalate dwarfs Iran’s. The US can extirpate Iran, or its leadership, or its military capability, or any inconvenient individual. The American potential for escalation dominance in beyond question.

The mullahs of course knew this, but clearly doubted the American will to escalate in a way that seriously threatened them. Hence Suleimani’s hubristic existence up to the moment of his vaporization.

The mullah’s palpable shock demonstrates that they now understand Trump’s will is far different from his predecessors, or that of the foreign policy establishment in the US.

Deterrence requires a combination the capability to destroy and the will to use it. The capability has always been there. The Iranians now know that they have to dramatically alter their assessment of the will.

Given that, don’t be surprised if the hand wringers are wrong. Again.

Yesterday, in the Dallas suburb of White Settlement, TX*, a repeat felon attended Sunday worship at the West Freeway Church of Christ, drew a shotgun, and opened fire, killing two people.

Within seconds, this piece of human offal was dead, killed by Mr. Jack Wilson, a parishioner working as a volunteer in the church security detail. Seconds after Mr. Wilson put down the thug, several other armed parishioners–also volunteers–were running to the sound of the shooting, ready to confront the assailant. But due to Mr. Wilson’s incredible gunmanship, there was no need.

And when I say incredible gunmanship, words fail. His was an unbelievable, awesome shot, as the livestream from the church service shows (starting about 2:37 of the video):

I am in awe of that shot. Probably around 40 feet way, he put the guy down. Not on the range shooting at paper. But in real life, with two friends already down, and a killer looking for another target. Long range plus pucker factor make that a truly remarkable shot.

I am not a slouch with a pistol, but I would never take that shot expecting a one shot kill: I would just hope to get the assailant on the defensive, keep firing, and hope to buy time for people to take cover and for backup to arrive. But he put one in the thug’s apple, and it was over.

Mr. Wilson was a parishioner, not a professional–though he does own a gun range, and obviously uses it. Nor were any of the others who leapt into action professionals: they were just parishioners, who had taken some training, and were ready to defend their friends and loved ones.

Unfortunately, the first man shot was also ready to defend, but could not draw quick enough. He paid for that with his life. But even then, his going for a weapon undoubtedly saved other lives by drawing the assailant’s attention to him. Which would not have happened were he not armed.

In 2017, in the aftermath of a church shooting in Sutherland Springs, TX, the state passed a law permitting the carrying of firearms in places of worship (which had been prohibited hitherto). Of course, that law caused the usual suspects to harrumph at the knuckle dragging Texans. These included the early-stage (or maybe not so early-stage) Alzheimer’s sufferer who is currently leading the race for the Democratic presidential nomination:

“…with all do respect to the governor of Texas, it’s irrational what you’re doing, loosening access to have guns, being able to take them into places of worship…” – @joebiden

His policies would have killed dozens today

pic.twitter.com/upIo1kvvmG

— John Cardillo (@johncardillo) December 30, 2019

Seems pretty rational in retrospect, eh?

It also included Mr. Expert on Everything, the Naval War College’s Professor of Gasbaggery, Tom Nichols.

And the fact that armed citizens prevented true mayhem, other assorted idiots felt obliged to weigh in. Such as one Shannon Watts, who apparently thinks that the thug that entered the church with an intent to murder would have been deterred from doing so before the change in the law:

– Shooter had a criminal record
– It was illegal for him to own the gun he used
– Good guy with a gun stopped the shooter in less than 3 seconds
– 7 others emerged in congregation with guns shortly after
– Gun Control didn't work
– Good guys with guns did

Shannon is an idiot. pic.twitter.com/pnQjUim983

— Caleb Hull (@CalebJHull) December 30, 2019

Or there’s Cathy Young (she has a blue check!), pathetically attempting to defend Tom Nichols:

FWIW, these are security guards, not gun-toting parishioners firing at random.
(Also, classy move, using tragedies to dunk on people who said something you didn't like about an unrelated incident) https://t.co/rGhJaQlAb8

— Cathy Young ?????? (@CathyYoung63) December 30, 2019

Einstein: the security guards were parishioners. Presumably Cathy would rather put her life in the hands of a mall rent-a-cop. Hell, I would much rather put my life in the hands of Mr. Wilson, who clearly can shoot better than 95 percent of actual cops–hell, maybe 99 percent. Nobody was “firing at random.” Mr. Wilson fired with a purpose–and with deadly aim.

And then there are The Professionals who think you are just too damn incompetent to defend yourself, or fellow worshippers:

Does the CIA manufacture its AWFLs on an assembly line pic.twitter.com/HU6jl05aJx

— Second City Bureaucrat (@CityBureaucrat) December 30, 2019

I think I recall an episode of The Andy Griffith Show where Barney Fife told Gomer pretty much the same thing.

And thousands of training hours? As if.

But here’s the thing. Even if cops could shoot better than Annie Oakley, they can’t shoot someone if they ain’t there. They’re really good at putting up the crime scene tape around your corpse, and putting those cute little flags in the locations of the spent shell casings, but that doesn’t do you a helluva lot of good when someone opens fire, does it?

And news flash: They ain’t Annie Oakley.

Then there are other blue check bozos who think that killing just isn’t the answer:

Shooting people isn’t the solution and it never will be. https://t.co/wasl4OdL03

— . (@MarisaKabas) December 29, 2019

Pretty sure there are dozens of people in White Settlement, TX who beg to differ. Mr. Wilson’s head shot decisively solved the problem of a bad man with a shotgun, intent on mayhem. Some people just need killing.

An armed citizenry is not a sufficient condition to prevent mass shootings. But it is a necessary condition, or damned close, both for the deterrent effect, and because of the greater potential to incapacitate a shooter. These things happen in seconds, and law enforcement will always be too late to do anything about it.

But the drumbeat on the left is to disarm the law-abiding, and thereby empower the murderous. White Settlement shows how insane–and frankly, evil–that is.

*The name of this little town is no doubt shocking to modern sensibilities. It was given to a pioneer community in the 1840s by the local Indians because it was the only non-native settlement for miles around. The town is clearly unashamed of its name, having voted down by a 4-to-1 margin a proposal to change it some years ago.

China’s economy exhibits numerous symptoms of severe weakness that even its most world-class product–economic statistic manipulation–cannot conceal. One indicator of this is an increasing number of bond defaults (more on this in a bit). But there are others. Such as imposing the death penalty on the CEO of a large bank, pour encourager les autres, presumably.

Perhaps the best indicator is the palpable indication of nervousness at the highest echelons of the political (i.e., CCP) leadership. For example:

As China struggles to deal with the slowdown of the world’s second-largest economy, it has embarked on a new strategy of placing financial experts in provinces to manage risks and rebuild regional economies.

Since 2018, President Xi Jinping has put 12 former executives at state-run financial institutions or regulators in top posts across China’s 31 provinces，regions and municipalities, including some who have grappled with banking and debt difficulties that have raised fears of financial meltdown.

Only two top provincial officials had such financial background before the last big leadership reshuffle in 2012, according to Reuters research.

This is utterly futile. Although it reflects a realization by Xi and his minions that there is a problem, it also reflects that they have no idea what the cause of the problem is. Indeed, it shows that they are completely captured by their worldview, which believes that China will achieve wealth–and world domination–via the wise guidance of the Party and its enlightened leadership. (This worldview is not limited to Chinese Party cadres–the likes of Tom Friedman and Naomi Oreskes* and numerous other bon savants in the West share it.)

Their solution is a symptom of the problem. China’s current incipient crisis is a direct result of its economic model, which relies on state-directed investment to meet growth targets. No, there is not a granular, proscriptive investment program a la Stalin’s USSR. But provinces and local governments face strong incentives to meet growth targets that are most readily met via massive investment in infrastructure and housing: that these kinds of projects create corruption opportunities is just part of the incentive structure. Further, the financial system, with its repression of consumption and flip-side of subsidized credit, has provided further incentives to indulge the edifice complex.

This has resulted in massive malinvestment. The financial straits of these government entities, and the financial entities that have funded them, are merely a manifestation of the malinvestment: the investments have not generated returns sufficient to cover the costs of financing them. This is pretty amazing, given the magnitude of the direct and indirect subsidies.

Appointing managers with more “expertise” to exercise control at the sub-national level is not going to fix the fundamental fault in the system. The fundamental fault inheres in the socialist, centralized, Party-dominated, investment/credit-driven model.

The USSR showed that a centrally planned system can generate glittering results in terms of official statistics. For a while. But this largely reflects the flaws in national income accounting, especially in highly state-centric economies. Investment is a cost–a use of resources–but counts as contribution to national income. Pile up the costs at an insane rate for years, and you can show totally awesome GDP growth rates!

But eventually, the chickens come home to roost. If the investments are ill-advised, they do not generate a stream of consumption (and remember that consumption is the point of production, and investment) than can recoup the costs. Honest accounting would require writing down of these “investments,” causing a drop in measured national income. But this is never done.

The Soviet Union went through this “yeah we have problems but we just need better managers” phase. And it was a phase. The next phase was a slide into economic collapse. The phase after that was . . . outright economic collapse.

The Chinese and Soviet systems are not the same. But they share essential similarities, the most notable being that they are/were investment-driven and centrally directed, and horribly misprice credit. The means of direction are quite different, but the ultimate trajectories are quite similar. Investment-driven models that focus on achieving national income growth targets are prone to eventual collapse because of massively perverse incentives that lead to horrible misallocations of resources.

This has interesting short-run and long-run implications for the US (and the West generally). (“Interesting” being the most fraught word in the English language.) In the short run, it provides the US with considerable leverage over China with regards to trade: serendipitous developments, such as Asian swine flu increase this leverage. In the longer run, the fundamental flaws in the socialist model with Chinese characteristics will sharply reduce the Chinese geopolitical threat.

The problem is the interval between the short-run and the long-run. Big powers facing decline or economic crisis are inherently a source of instability. This problem is exacerbated in China, where the personalized, de-institutionalized nature of government under Xi also creates internal sources of instability. Xi is mortal, and has grandiose ambitions: as he sees the time to achieve those ambitions shrink, his incentive to take risk increases. Further, such systems are inherently unstable when the leader dies or becomes incapacitated because of succession crises–crises that are exacerbated by the fact that the ruler has a strong incentive to crush potential successors, rather than cultivate them.

Thus, there is likely to be a period of substantial internal turbulence in China, and this could have dire implications for the US and the world, especially given the changes that Xi has wrought in recent years.

In sum, China is entering the “we need better managers” phase of its development. This is a symptom of socialism, and a sign on the road to severe economic decline. A socialism syndrome, if you will. As an avowedly socialist country, China is not immune. Indeed, methinks it is particularly susceptible, especially given the neo-Maoism of Xi. This bodes well for no one.

*Oreskes is a Harvard “historian of science” who is primarily responsible for manufacturing the factoid (or should I say fiction?) that 97 percent of scientists believe in the threat of anthropomorphic climate change. Per the linked article: Oreskes believes in “change, owing perhaps to a sensible program of environmental regulation under Communism, and vindicating ‘the necessity of centralized government.'”

Sensible environmental regulation under Communism. LMFAO. Every Communist country is an environmental nightmare. I remember reading the official English-language Chinese paper when I was in China in the mid-2000s. It was a litany of environmental catastrophes. I truly shuddered when I thought that this was probably the sanitized view.

And has Naomi been to Beijing in January?

These are our better thans, people. FFS.

Last week, Trump signed into law a bill authorizing sanctions against any company involved with the construction of the Nordstream 2 gas pipeline. Almost immediately thereafter, Ted Cruz sent a letter to Swiss company Allseas, which is laying pipe, stating that they were at risk of sanctions unless they ceased these operations. Almost immediately after that, Allseas announced that it was suspending work.

And almost immediately after that, Angela Merkel lost her shit:

“We are against extraterritorial sanctions, and not just since this decision yesterday — we also have this problem with a view to Iran,” Merkel told German lawmakers, referring to the Trump administration’s withdrawal from a deal between world powers and Iran meant to curb concerns over Tehran’s nuclear program and the imposition of new sanctions.

“I see no alternative to conducting talks, though very firm talks, (to show that) we do not approve of this practice,” Merkel said during a regular question-and-answer session in parliament. “We will see how things go with Nord Stream.”

You want talks, Angie baby? Talk to the hand.

I liked the part about Iran especially. Maybe she’s miffed because the secondary sanctions make it harder for Germany to help Iran finish the job the Germans started.

There has been a lot of bleating about how this American policy is intended to advance American economic interests, specifically US natural gas producers and LNG exporters. Maybe so, but any such criticism from Germany is an extreme case of projection, given its obsession with promoting German exports, including at the expense of the Greeks, etc.

There has also been a lot of bleating about how this is an attack on an American ally, and Nato. Well, as I’ve written ad nauseum, Germany is a pretty horrible ally of the US, and has been the biggest deadbeat in Nato for years. It spends chump change on defense, and as a result has an air force with few operational aircraft, a navy with few operational ships (and at times no operational submarines), and an army that trains with broomsticks.

Indeed, it is Germany’s persistent failure to pull its weight–hell, to pull Belgium’s weight–in Nato that no doubt makes Trump relish sticking it to them.

Payback is a bitch, Angela.

Further, the bleating about this being an attack on Europe, and Nato, is a particularly bad joke, given that large swathes of Europe and Nato detest Nordstream 2, and view it as Germany selling them out to the Russians. Poland is particularly outspoken on the issue:

“Despite the involvement in the Nord Stream 2 project of companies from some EU countries, this pipeline has never been a European or EU project,” said Polish Deputy Foreign Minister Pawel Jablonski, quoted by the PAP news agency.

“Instead, it remains an instrument for the realisation of Russian economic and, potentially, military policy.”

And it also undercuts Ukraine. You know, the country that Trump allegedly screwed for political gain, and for which Merkel constantly sheds crocodile tears.

That is, the Germans are even more two-faced than usual when it comes to alliances. Their idea of an ideal ally is someone who does what they want and lets them do what they want. Everyone else is an enemy.

The Russian (and Ukrainian) aspect of the story requires Merkel and other Trump critics to give Fitzgeraldian demonstrations of first-rate intelligence, i.e., holding two opposing thoughts in mind while retaining the ability to functoin These people tell us that Trump is in Putin’s thrall. But rather than acknowledging that he has implemented an avowedly anti-Russian policy (and the US has constantly harped on this aspect of Nordstream 2) by sanctioning the pipeline, the Germans and other euroweenies pivot to criticizing Trump for daring to trample on their sovereignty and harming European businesses.

As Churchill said, the hun is either at your feet or at your throat. Here, Germany is at the Russians’ feet, and at Trump’s throat–for having the audacity for going for a Russian economic jugular.

And they are singularly clueless in their failure to recognize that this duplicity is exactly why Trump DGAF about their objections to his policy.

It’s interesting to note that this dispute echoes one of the few serious disagreements between Thatcher and Reagan. In 1982, the Reagan administration was adamantly opposed to the construction of pipelines to export gas from Siberia to western Europe. (Ironically, these pipes are now the ones that are the source of chronic friction between Ukraine and Russia.) Despite her stalwart anti-Soviet policies, Margaret Thatcher supported the pipeline, on purely economic grounds: a UK firm located in economically depressed Scotland was a supplier to the pipeline, and almost two thousand jobs would be lost if they pulled out.

Reagan disagreed on broader geopolitical grounds. But back then, secondary sanctions were not an arrow in the American quiver–and Reagan probably would have shrunk from imposing them on the US’s closest ally. So the pipeline went forward.

Though not without Reagan getting a measure of revenge. The Soviets wanted US software to operate the pipeline, and of course they couldn’t obtain it through legitimate channels. So they tried to steal it, like they had stolen a lot of US technology before. The Reagan CIA was onto this, however, so they allowed the Soviets to steal software that turned out to be a Trojan horse. After a few months of operation, the Trojan kicked in, and completely disrupted the operation of the pipeline–and indeed caused an explosion on the pipeline in Siberia. The explosion was so large it could be seen from space, in what was supposedly the largest non-nuclear human-caused explosion ever.

Now I doubt that Trump would give a go-ahead to blow up Nordstream 2, given that the catastrophe would be in the Baltic, rather than the Siberian wastes.

But I am sure that there are days when he is tempted, given Merkel’s hypocrisy.

Which brings a thought to mind. Another source of bitter contention between the US and Germany is Huawei, which Merkel stubbornly insists on allowing to participate in Germany’s 5G rollout despite the extreme security risks that it poses. If Germany indeed flouts the US’s objections, and there is a subsequent failure in the German 5G system, it would be quite reasonable to collude that this wasn’t an accident, comrade.

Remember, Angela. You reap what you sow.