Power & Market

When the term “evangelical” is tossed into the modern public square, it usually is accompanied by words like “Trump,” “January 6,” “right-wing,” “Christian nationalist,” “racist,” and the like. Like others who have spent their entire lives in the American evangelical subculture, I cannot say I have welcomed this step into the political arena in which arguments that should be nuanced suddenly are labeled black and white, and that all too often, we are told that the entire fate of Christendom depends upon the election of Candidate X.

This situation was not part of the American scene for most of the nation’s existence. In my formative years, no evangelical (or even fundamentalist) pastor would have openly endorsed a candidate from the pulpit (although some Protestant pastors did wonder aloud what would happen if the Roman Catholic candidate John F. Kennedy were to be elected).

All of that changed in 1972 when the Democrats nominated George McGovern for president. McGovern campaigned far to the left not only in his anti-war views (which many libertarians, including Murray Rothbard, gladly endorsed) but also in his opinions about economics or, to be more specific, the role of the state in a nation’s economy. While evangelical pastors and laypersons certainly had opinions about both men, preaching a gospel of Nixon or McGovern would not have been popular in the congregations.

However, a professor at an evangelical college Ronald Sider, who passed away recently, formed a group called Evangelicals for McGovern in which he claimed that McGovern’s platform could be considered Biblical in its social outlook. Christianity Today, in an obituary for Sider, noted:

Sider also became more politically active. He campaigned for George McGovern, founding Evangelicals for McGovern to rally support for the anti-war senator from South Dakota who was maligned by his many opponents as the candidate for acid, amnesty, and abortion.

According to historian David Swartz, Evangelicals for McGovern was the first evangelical group after 1945 to support a presidential candidate. Religious Right groups such as the Moral Majority and Christian Coalition had not yet organized, and though many prominent leaders such as Billy Graham supported President Richard Nixon, evangelical politics at that moment seemed “up for grabs.” Sider, along with people like Tom Skinner, Jim Wallis, and Richard Mouw, wanted to grab it. They believed Christians who loved Jesus and hated sin should exert their political will to oppose the war in Vietnam, law-and-order politics, and economic policies that aggravated poverty.

A year later, Sider and a number of hard-left activists wrote the Chicago Declaration, which condemned private enterprise in the United States, blaming capitalism for most social ills and calling for a vast expansion of the welfare state. In Sider’s view, the only possible Biblical position that a Christian could legitimately own was one of anti-capitalism.

In 1977, Sider wrote the book for which he was most famous, Rich Christians in an Age of Hunger, which I mentioned in a previous article about Christians and economics. I wrote:

Sider’s book looked at poverty in the world at that time and concluded that the only reason that Third World countries were poor was because North America and Europe were relatively wealthy. These countries were gobbling up the world’s resources unjustly and leaving nothing for the starving masses. Capitalism was the culprit, Sider argued, and while he did not agitate for outright socialism, he did call for a central power in the world to oversee massive wealth transfers, a worldwide welfare state.

I continued:

The book fed well into the evangelical mindset of seeing the world in black-and-white terms. It also provided evangelicals, who were likely to be ridiculed by elites in academe, politics, and the media for their faith, a way to be relevant and to try to earn favor with those same elites for their newfound compassion for the poor. The book itself presented a simple, black-and-white view of wealth and poverty; people who had wealth had stolen from the poor, and there could be no other explanation.

Sider’s central message was that unless Americans, Canadians, and Europeans gave up their wealthy lifestyles and agreed to adhere to a simple life—and stop using so many resources—poverty and starvation would expand throughout the planet and rates of poverty would accelerate. He even prophesied that unless this was done immediately, it would be maybe a decade before Third World countries like India that had nuclear weapons would use them to blackmail the West into giving up their wealth.

In Sider’s world, the economy was purely zero-sum in which any gain by one person meant someone else was to be made worse off. He told a story about himself in which he excoriated his own choice of purchasing a suit for $50 because that sum of money could have kept a child in India alive for a year. Toward the end of the book (ironically, in a footnote) he called for almost total deindustrialization of the West, claiming that without large scale manufacturing and transportation, people would not have to work as many hours and would have much more time for leisure and games, and that such a move would also eliminate hunger in the developing world.

The book was wildly popular among evangelicals, including the Christian college where my father (and later I) taught. Sider had struck a chord with students, encouraging them to embrace socialism and to see that even though the political left despised Christianity, it was the left that held to the True Faith when it came to dealing with people in poverty. At that time, the publisher of the book, InterVarsity Press, was moving leftward, along with its parent organization, InterVarsity Fellowship, which had a strong presence among American college students. (I was involved in our IVF chapter at the University of Tennessee in the early 1970s.)

In the various tributes to Sider, he is universally praised for his social activism and his vision of social justice. Likewise, his political activism in nearly every U.S. presidential election was expressed in his organizing a “Evangelicals for…” with the Democratic Party candidate filling in the blank. (He did make an exception in 2000, voting for George W. Bush, who then promptly launched the nation into ruinous warfare.)

While Rich Christians was wildly popular (the best-ever sales by IVP), Sider never had to pay a price with his peers for being woefully wrong about free-market economics. In his world at Eastern University, which has long been known for its leftism, Sider was a rock star and he never had to confront the fact that his book, as the late Gary North well put it, was an attempt to make American Christians feel guilty for being alive.

By all accounts, Sider was a humble person and someone who surely would have been a good neighbor. I’ve never heard anyone speak ill of him personally. However, by openly politicizing the Christian faith, and more specifically tying the Christian faith to the outcome of upcoming elections, Sider did untold damage that will not go away in our lifetimes.

On May 4, Jerome Powell dismissed the possibility of the Federal Reserve hiking the federal funds rate by three-quarters of a percent.

On June 15, he announced that America’s central bank was doing just that, a reminder that the Fed continues to give itself more power over the economy, even as it repeatedly demonstrates an inability to predict inflation, economic growth, or even its own policy.

Markets were already reacting to the move days in advance after a deliberate leak of the Fed’s decision to the Wall Street Journal this past weekend. The result is tens of millions of Americans watching their net worth collapse with stocks, cryptocurrencies, and other financial asset prices as investors pull capital away from investments and into cash and other safe harbors.

Of course, the demand for these investments that are now being devastated by rate hikes was itself a deliberate policy goal of the Federal Reserve. Low interest rates maintained by aggressive quantitative easing and other new Fed tools were designed to discourage Americans from saving in traditional banks and low-risk financial assets. The Fed subsidized risk, and risk is what we have.

While panic over America’s economic environment is starting to make its way into the pages of the corporate press, savvy Fed watchers have been warning about this self-made trap for years. On the Mises Wire, Austrian analysts like Daniel Lacalle, Thorsten Polleit, and Brendan Brown have warned about the damage a decade of monetary hedonism has done to the financial health of the global economy. The lingering question has been whether central banks' concern over price inflation would trigger the policy corrections necessary to pop what Lacalle has called "the bubble of everything." 

The Fed seems to be trying. We will see how other central bankers respond.

The fight against inflation should illuminate one of the most important, but often overlooked, parts of the Austrian understanding of business cycles. While a lot of the online conversation about Fed policy will often focus on the dollar's declining purchasing power or concerns about hyperinflationary environments due to central bank mismanagement, the more pressing insight is the true costs of the malinvestment that occurs in a low interest rate environment.

Artificial credit expansion means capital is invested in firms and industries that would not appear profitable without the intervention of central banks. One way we can see this manifested is in the form of zombie companies, which are firms whose operations are not profitable and that depend upon cheap debt to survive.

As Joshua Konstantinos noted on the Mises Wire in 2019:

Following the Great Recession, zombie companies became a worldwide phenomenon. Even with today’s very low interest rates; more and more companies are unable to pay the interest on their debts out of profits. According to the BIS, the share of zombie companies in the US doubled between 2007 and 2015, rising to around 10 percent of all public companies. And counterintuitively, as interest rates have fallen lower and lower the number of zombie companies has increased.

These numbers, of course, do not consider the financial frenzy that was created as a result of covid-related policies after the article was written.

An additional consequence of the Fed’s subsidization of risk in the financial system is damage done to important institutional investors. Pension funds and insurance companies, for example, have been forced to manage investment portfolios at a time when government bonds and other historically low-risk investments are yielding little. In such an environment, these institutions can either reduce payouts in the future or adjust their investments to higher-yield assets. If an aggressive increase in interest rates ends up taking down a large portion of these zombie companies, this could secondarily impact millions of Americans who never benefitted from the stock market.

It is precisely these deeper consequences to the busting of financial bubbles that inspired Ludwig von Mises to spend so much effort in trying to illustrate the consequences of central bank–fueled malinvestment. As he notes in Economic Policy:

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.

The question going forward is how truly dedicated the Fed is to its campaign against price inflation. The purpose of its severe move, the largest single move in forty years, is to demonstrate a willingness to act boldly in the future—the Powell Fed has enjoyed a reputation for being willing to bring out "a bazooka," nerd speak for engaging in aggressive monetary policy. This was also an act of political necessity: $5 gas and double-digit increases in food costs is the sort of kitchen table issue to get Americans very angry at politicians and their bankers.

Will those calculations change with Americans seeing their 401(k)s draining away? Data from the Atlanta Fed is now signaling an official recession in the coming months. Will Jerome Powell be willing to increase rates with those head winds?

Only time will tell.

What we can be confident about is that the damage the Federal Reserve has done to the economy is only now being exposed. Unfortunately, the institution responsible is as blind and powerful as it has ever been.

University of Chicago professor John Mearsheimer gave a lecture to a group of university alumni in 2014 entitled “Why is Ukraine the West’s Fault,” essentially predicting the Russo-Ukrainian war. The lecture has over 24 million views. Even though he’s been accused of pro-Putin sympathies, Mearsheimer approached the topic of NATO encroachment and Russian security concerns from a dispassionate perspective, using international relations theory to see the situation from the Russian side. 

Much how Misesians search for the “regularity in the concatenation and succession of events,” international relations theory tries to observe regularities in the way states behave. By understanding the operation of the international system of states, strategists and policymakers can generalize and hopefully predict global events, like incursions. Just like in economics, theory models empirical reality. For IR scholars, that reality is the relationships among states in the international system. Ultimately, the field of international relations offers three broad lenses through which observers can view the world: realism, liberalism, and constructivism.

Realism

John Mearsheimer is among the foremost experts in international relations who view the world through a realist lens. Realism focuses on the absence of an overarching global government that can harness the behavior of state and non-state actors. In other words, the world lives under a state of international anarchy. As a result, states pursue security above other concerns. Distrust of other states means that they can only truly rely on themselves to protect their national interests, a principle known as self-help.

Thucydides’ History of the Peloponnesian War in the fifth century BCE first formulated the basic assumptions of realism. First, the state is the primary actor in international politics. Second, the state is a unitary actor. Third, the state is a rational actor: it weighs costs and benefits, seeking to maximize utility in the decisions it makes. Fourth, the state focuses on security from both foreign and domestic threats. To the methodological individualist, these assumptions that states take on the characteristics of subjective and acting human beings seem exaggerated. As the state can be defined as that institution that enjoys the monopoly on the legitimate use of violence within a given territory, it stands to reason that states would also project that violence outward in the name of self-preservation.

Hans Morgenthau and Kenneth Waltz applied realism to the modern international state system, which began after the Peace of Westphalia in 1648. Morgenthau (1948) argued that states struggle against each other for both military and economic power, leading to an acute focus on relative—rather than absolute—gains compared to other states. A feature of this struggle for relative gains is the security dilemma, a situation in which one country responds to an increase in the capabilities of another country with a counter increase in capabilities. A tit-for-tat increase in capabilities ensues, leading all sides into a state of tension where no side has an incentive to back down.

Kenneth Waltz (1979) developed neorealism, also known as structural realism, positing that the structure of the international system explains international politics better than any inherent and universal characteristic of states. His Theory of International Politics theorizes that the distribution of power in the world determines peace and war. In particular, the world can be unipolar, bipolar, or multipolar. Bipolarity and multipolarity represent more distributed balances of power than the current “unipolar moment” that the United States enjoys today. It is an open question—and one that theorists actively debate over—whether unipolarity, bipolarity, or multipolarity leads to greater global peace.

Liberalism

Liberalism states are more cooperative, challenging the realist assumption that states are primarily in conflict with one another. Through trade, treaties, norms, diplomacy, and international institutions, states emphasize peaceful transaction over zero-sum power projection. Although this IR theory of liberalism derives from Enlightenment thinkers, it is not a prescriptive ideology like classical liberalism. Remember that IR theories try to formulate a generalized model about how states operate in the international system. Accordingly, IR liberalism views states as rational individuals are, cooperating and transacting for mutual benefit. 

Mutual benefits can accrue when states create institutions to enforce rules that govern behavior, to allow states to communicate, and to mediate disputes. Collective security arrangements provide security guarantees to member states if one should be aggressed against by an outside actor. This collective defense provides an initial deterrent to would-be aggressors. Likewise, liberals do not ignore security as a concern. Rather, they see cooperation as an observable way that states reckon with international anarchy.

A modern variant of liberalism is neoliberal institutionalism, which argues that states cooperate most of the time through what Robert Keohane and Joseph Nye (1977) termed complex interdependence. States interact through multiple channels, in addition to formal diplomacy, and have a range of issues through which agreement can be derived. Military force then moves increasingly farther down the preference scale of states the more they interact and depend on each other. Repeated interaction among states helps them find common interests and reduces their incentive to exploit each other’s weaknesses through military force. International governmental organizations, or IGOs, facilitate these interactions to generate mutual benefit.

Constructivism

A third and less unified theory of international relations called constructivism focuses on norms and identities for explanations of global politics. States derive their identities from individuals, cultures, and norms and thus view international anarchy to be interpreted differently by each state. Consequently, states with opposing identities might have divergent interests in international politics.

Alexander Wendt (1992) stated that “anarchy is what states make of it,” expressing the common postmodernist critique of reality as being socially constructed. States view the world in terms of their elites’ beliefs, identities, and social norms. Where realists will point to states as being primarily security-oriented, constructivists will counter that security, and national interests for that matter, has no single objective meaning that can be applied to all states. In addition, what constitutes as an identity or norm evolves over time, rendering blanket assumptions of state behavior inert.

The power of ideas is important to constructivists. Diffusion of ideas, culture, and language through internationalization, socialization, or hybridity become ways in which identities can be shaped. Constructivism does not contribute an overarching theory about states, as realism and liberalism attempt to do, and it is often thought to be more of a critical theory like Marxism or feminism. Its value in interpreting international politics is in recommending to analysts that they should study the individual cultures, histories, values, and norms each country carries with it to the international scene.

Applying These Perspectives to the Real World

The most visible international event currently is the Russo-Ukrainian War. Russia was powerless to halt the NATO enlargements of 1999 and 2004, which incorporated many of the former Soviet and Soviet-bloc countries of Eastern Europe and the Baltic Sea coast. NATO moved into Russia’s historical sphere of influence and abutted Russia’s western border. NATO sought further encroachment: in 2008, it declared its support for eventual Georgian and Ukrainian accession to the alliance. Vladimir Putin pushed back, calling it a direct threat to Russia. Like NATO, the European Union simultaneously sought eastern integration with its Eastern Partnership proposal to bring Ukraine gradually into its economic orbit. 

Ukrainian domestic politics further exacerbated the tensions. American-backed protests in 2014 culminated in the ouster of Ukrainian president Viktor Yanukovych and the installing of a pro-Western regime in Kyiv. Shortly after, pro-Russian Ukrainians and ethnic Russians in Crimea occupied government buildings, and Russia annexed the peninsula after a secession referendum. NATO war games in the Baltic, American arming and training of Ukrainian troops, and an evolving de facto integration of Ukraine into NATO and the EU sphere of influence preceded a Russian invasion of Ukraine in late February 2022.

Realists, liberals, and constructivists view this situation in different ways. Realists center their analysis on the security interests of states and power distribution. Western influence created a security threat to Russia and a relative power imbalance in favor of the West. Russia’s actions reflect a protection against Western encroachment to protect its security interests. 

Liberals emphasize domestic politics and the role of international institutions in the conflict. The coup in 2014 that brought into power a pro-Western government prompted Russia to undertake actions that would destabilize the country and pull Ukraine back into its trade orbit. A pro-Western population within Ukraine saw in NATO and the EU a way to advance their interests, reducing Ukrainian economic dependence on Russia.

Constructivists look more at diverging identities in the conflict. The attraction of pro-democratic Western identity stood in stark contrast to the authoritarianism of Putin’s Russia. Patriotic rhetoric from the Kremlin emphasized Russian identity and justified Crimean annexation as a reterritorialization of a historical Russian land.

International relations scholars view these main theories as both complementary and distinct ways of looking at the world. While staunch realists like Mearsheimer predicted the Russian reaction to NATO encroachment, many observers view these theories as tools in a toolbox of perspectives to consider when interpreting world events. Accordingly, it is important to understand that IR theories provide lenses for interpretation rather than a set of public policies that should be pursued. In other words, IR theory is value-free, seeking to understand how the world works. This outlook stands in contrast to ideologies of domestic politics or foreign policy, which are methods for achieving ends.

Foreign policy prescriptions may, however, follow from viewing the world through one of these theories. Offensive realism argues that international anarchy requires states to seek opportunities constantly to improve their relative power positions against other states. Defensive realism sees this strategy as misguided. Instead, states should enact foreign policies of restraint to avoid provoking other countries into belligerence. Liberals generally see economic interdependence, democracy, and international institutions as peacebuilding. As a result, liberals seek to expand democracy, trade relations, and international institutions on the global system and among other countries. They see liberal values as mutually beneficial for the United States as well as the target countries. Some, however, like Woodrow Wilson, George W. Bush, or Hillary Clinton, might like to impose these institutions and relationships by force. Like IR theory generally, these approaches can overlap and do not correspond to ideologies on the political spectrum or compass. IR theory is to foreign policy as economic theory is to economic policy. Both try to understand the world as it is and then derive policy that would best achieve ends sought. 

Bibliography

Koehane, Robert O. and Joseph S. Nye. Power and Interdependence: World Politics in Transition. Boston: Little, Brown and Company, 1977.

Morgenthau, Hans J. Politics Among Nations: The Struggle for Power and Peace. New York: Alfred A. Knopf, 1948.

Waltz, Kenneth N. Theory of International Politics. Boston: McGraw-Hill, 1979.

Wendt, Alexander. “Anarchy is What States Make of It: The Social Construction of Power Politics.” International Organization 46, no. 2 (Spring 1992): 391-425.

The Fed has finally raised its benchmark interest rate in order to fight (price) inflation.

If this strategy makes sense, it’s reasonable to ask: Are low interest rates the cause of currency debasement?

To accept this idea, one must accept that low rates caused the increases in the price of gas, groceries, cars, drugs and college tuition. The boom in commodity prices such as gold, palladium, wheat, sugar and oil would also be attributed to low interest rates. Yet when one looks at the history of interest rates and prices, there is no long-term correlation between the two. Even if there was, it wouldn’t prove causation as other variables, like the money supply, would have to be factored in the equation.

Hyperinflation and currency collapse are historically the result of increases to the money supply. Venezuela has an interest rate at 57.99%. Turkey’s rate is 14% and Brazil is at 11.75%. They’ve been struggling with high inflation or hyperinflation for quite some time.

Then there’s Zimbabwe, which provides a great opportunity for everyone to learn about inflation:

Zimbabwe’s annual inflation rate peaked in November 2008, reaching 89.7 sextillion (10^21) percent.

The country currently has an interest rate of 60%. Over a decade after their central bank destroyed its currency, they continue to have sky-high interest rates to fight price increases, apparently learning nothing from past mistakes.

It’s worse when you read comments from their central bank. Bloomberg quoted Reserve Bank of Zimbabwe Governor John Mangudya, just last month, who said:

If we see inflation going up in February and in March, brace up for very high interest rates… There is a trade off between inflation and high interest rates, all central banks are tightening monetary policies so that we can get out of high inflation.

Is it hilarious or just plain sad that comments from the head of Zimbabwe’s central bank are indistinguishable from comments from Fed Chair Powell; or does Zimbabwe take its cue from the Fed? Powell raised interest rates today, citing a similar reason, saying:

The economy is very strong, and against the backdrop of an extremely tight labor market and high inflation, the Committee anticipates that ongoing increases in the target range for the federal funds rate will be appropriate.

CNBC also ignores the problem with inflationism as public policy, noting that the Fed’s:

…main tool to battle inflation is interest rates.

It’s inexcusable that when it comes to fighting currency debasement, the quick fix is to make debt more expensive, paying little attention to the money creation mechanism.

Imagine, living in Zimbabwe, seeing a money supply chart that looks like this then learning the central bank will raise rates to fight inflation:

zimbabwe_money_supply.png

Yet here we are. Of course, rates matter. They influence prices, but countless factors influence prices. Ultimately, when the cost of living perpetually increases year over year and then one day a currency collapses, there is only one factor to blame, and it’s not interest rates. The cost of living is up in America because the Federal Reserve created nearly $5 trillion in the last two years while M2 increased by nearly $7 trillion in the same amount of time. There really is no mystery to inflation; there are only stories that central bankers tell.