Power & Market
Reflections on Last Friday’s Jobs Report: The News Still is Bad
Stocks reacted positively to the jobs report released Friday morning before selling off sharply that afternoon on geopolitical fears. The report, which showed non-farm payrolls increased by 315,000 for the month of August, was largely in line with the expectations of market watchers, with major surveys held in the run-up to the release of the report yielding predictions of roughly 300,000.
Of itself, the rally was somewhat unexpected since the report seemed to back the hawkish stance reiterated by Federal Reserve Chair Jerome Powell at Jackson Hole last week. At the meeting he restated the Fed’s commitment to further tightening. The implied probability of Fed futures data has shifted accordingly, with oddsmakers having raised the possibility of a further .75 point hike to 75 percent.
With various indicators suggesting inflation might be peaking or slowing, many over the summer had come to hope such data would convince the Fed to signal a readiness to ease up on tightening credit conditions. After all, the economy was slowing. For example, while the figures reported on Friday were in line with estimates, they were still well short of July’s half a million. At the same time, unemployment increased from 3.5 to 3.7 percent.
And, frankly, there are reasons to look askance at these numbers. For one thing, they are likely to be revised, with like reports over the past two decades seeing an eventual average adjustment of plus or minus 55,000. If the report was “just right,” not too hot to stoke inflation, not too cold to stall the economy, such a regular adjustment would be problematic. In addition, there are large discrepancies between federally withheld taxes and purported hiring, and between the Labor Department’s household survey and the Census Bureau’s employer survey used in headline unemployment numbers – both of which suggest the labor market is actually much weaker than the headline numbers make out.
For example, the Census Bureau’s unemployment figure does not include those who after becoming unemployed eventually give up looking for work and drop out of the labor market.
As the above figure illustrates, the Great Financial Crisis and pandemic-era have led to serious declines in overall labor force participation rates. Millions of workers never returned following the shuttering of the economy in response to COVID, amplifying what was already predestined to be a period of demographically induced labor market tightness. As the legions of America’s baby boomers retired, economists had predicted much of the current labor market predicament decades ago.
A shortage of workers, continuing supply chain disruptions, and epic monetary mismanagement having coincided, it is little wonder retail sales and housing are slowing; critical commodities, such as copper and oil, are trading down; and consumer confidence is just up from its lowest level in 70 years of measurement.
With signs pointing increasingly negative, talk of a “soft landing” is going the way of “transitory” inflation. Seemingly determined not to back down, to regain price stability, a “growth recession” is now the target. Far from backing off rate-hikes for fear of impending recession, as it did in 1974, Fed officials now openly admit that tightening may continue into 2023, with rates being held at that level for some time after.
With the chances of a decrease in the size of September’s rate hike, from .75 bps to .50 bps, getting smaller, and stocks still expensive by historical standards, as measured by the price to earnings ratio, a sell-off on the jobs report Friday would have seemed more in line with the broader macroeconomic conditions.
But whereas job numbers can be massaged or spun, the response of markets to word that gas supplies to Germany from Russia were going to be suspended for an indefinite period just hours after the G7 announced their price capping strategy, was a reminder that some news is just unambiguously bad.
As the war in Ukraine grinds on and the global economy weakens, we can expect more such news.
Rothbard was Right about Water Fluoridation
Water fluoridation was pushed in the United States as a public health policy for interventionist gain. The medical and environmental research has since shown that the alleged dental benefits to water fluoridation are outweighed by negative effects on other systems in the body. This compulsory measure has not only violated the rights of consumers, but it is also antithetical to human health.
Murray Rothbard in his 1992 essay Fluoridation Revisited uses his training as a historian to weave an engaging yet accurate narrative of who did what for who's benefit in the push for water fluoridation in the mid-20th century.
Of particular interest to me is the role the Mellon Institute, ALCOA's research lab in my home of Pittsburgh, played in bringing about compulsory water fluoridation:
In 1931, the PHS sent a dentist named H. Trendley Dean to the West to study the effect of concentrations of naturally fluoridated water on people’s teeth. Dean found that towns high in natural fluoride seemed to have fewer cavities. This news galvanized various Mellon scientists into action. In particular, the Mellon Institute, ALCOA’s research lab in Pittsburgh, sponsored a study in which biochemist Gerald J. Cox fluoridated some lab rats, decided that cavities in those rats had been reduced, and immediately concluded that “the case [that fluoride reduces cavities] should be regarded as proved.”
The following year, 1939, Cox, the ALCOA scientist working for a company beset by fluoride damage claims, made the first public proposal for mandatory fluoridation of water. Cox proceeded to stump the country urging fluoridation. Meanwhile, other ALCOA-funded scientists trumpeted the alleged safety of fluorides, in particular the Kettering Laboratory of the University of Cincinnati.
During World War II, damage claims for fluoride emissions piled up as expected, in proportion to the great expansion of aluminum production during the war. But attention from these claims was diverted when, just before the end of the war, the PHS began to push hard for compulsory fluoridation of water. Thus the drive for compulsory fluoridation of water accomplished two goals in one shot: It transformed the image of fluoride from a curse to a blessing that will strengthen every kid’s teeth, and it provided a steady and substantial monetary demand for fluorides to dump annually into the nation’s water.
One interesting footnote to this story is that whereas fluorine in naturally fluoridated water comes in the form of calcium fluoride, the substance dumped into every locality is instead sodium fluoride. The Establishment defense that “fluoride is fluoride” becomes unconvincing when we consider two points: (a) calcium is notoriously good for bones and teeth, so the anti-cavity effect in naturally fluoridated water might well be due to the calcium and not the fluorine; and (b) sodium fluoride happens to be the major by-product of the manufacture of aluminum.
30 Years Later
As it turned out, the research has shown that the nondental effects of water fluoridation in humans is harmful, according to health literature. Professor Philippe Grandjean published a 2019 meta-analysis on the subject titled Developmental Fluoride Neurotoxicity: An Updated Review in the Journal of Environmental Health. Multiple large studies have shown that fluoride in early development “can result in IQ deficits that may be considerable.”
As for the prevention of dental cavities, Grandjean and others propose topical use of fluoride for that purpose, rather than systemic ingestion of fluoride.
Calculating the Yearly Population Level IQ Loss in Newborns due to Water Fluoridation in the United States
Here I will attempt to calculate a rough estimate for the net IQ loss in Newborns in 2020 in the United States, using the causal research combined with population figures and data on overall water fluoridation levels in the United States. Perhaps of more interest to curious readers would be a similar calculation for your local municipality that fluoridates its water.
About 3.6 million babies were born in the US year 2020, and 73 percent of the US population "receive water that has the optimum level of fluoride recommended for preventing tooth decay." And that "optimum level" per the CDC is 0.7mg/L which is equal to 0.7 parts per million. And in prenatal urine the benchmark concentration level (BMCL) to cause a 1 IQ point drop for children is 0.2mg/L (at a confidence level of 95 percent). [A big thank you to Professor Philippe Grandjean who pointed me to this article after I read his 2019 meta-analysis on the topic.] And we can assume this relationship is linear above the BMCL, as that best approximates the current data. There is a 1:1 relationship of water concentration to urinary concentration of fluoride. Therefore, pre-natal IQ loss from fluoride is 3.5 points per child whose mother drinks primarily fluoridated water at "optimum levels".
If that 73 percent of the US population's water has the "optimum level" of fluoride, translates to 73 percent of Pregnant women getting the "optimum level" of fluoride. Then 73 percent of newborns each year are experiencing this 3.5-point IQ deficit, with 73 percent of the 3.6 million babies born in the US in 2019 being 2.628 million.
2.628 million newborns with an unrealized IQ potential of 3.5 points each means that: 9.198 million IQ points of newborns were lost due to water fluoridation in one year in the US.
Not only that, but this number also undercounts the total newborn loss of IQ due to water fluoridation because the water fluoridation in some areas is higher than the "optimum amount" of 0.7mg/L. In some areas it is lower than that "optimum amount" yet still higher than the BMCL (benchmark concentration level bound) for 1 point of IQ loss, which is equal to 0.2mg/L. However, we are only counting the 73 percent of the US population that receives water at that “optimum level” per the CDC of 0.7mg/L.
The ongoing newborn population IQ loss due to water fluoridation is a public health disaster. Not only is it harmful, but it also violates the Nuremberg Code of Medical Ethics. It is imperative that local authorities cease the fluoridation of municipal water supplies and leave medical decisions between individuals and doctors that have earned their trust.
RIP Ronald Sider: The Man Who Was Ground Zero for Modern Politicized Evangelical Christianity
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.
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.
Recession Is Priced In. Stagflation Is Not
The market is betting on recession and subsequent Fed pivot. A sound bet… but there is one flawed assumption.
Dec 22 and Mar 23 Eurodollar futures have inverted. In layman’s terms, the market is predicting a Fed rate cut in Q1 of 2023:
Yet neither CPI nor PCE have declined to any meaningful degree:
The market expects a return to easy money but NOT because the Fed has reduced inflation and instead due to troubling economic projections:
Atlanta Fed predicts Q2 GDP growth to be -2.1% (a technical recession)
This is textbook Stagflation:
Gold ought to be a preferred Stagflation asset as its demand is less tethered to real economic activity than virtually all other commodities. Yet, gold mining stocks have taken quite the beating:
GDXJ making new 52-week lows on a day when ARKK rallies 9%:
Today’s ARKK action may be partially attributed to profit taking by the shorts. However, the current zeitgeist is that bad economic news = good market news and an assumption that unprofitable tech names ought to rally hardest given they took the biggest beating. This assumption is bogus.
When the Fed does pivot, if inflation has not yet been reigned in, while the drop in Treasury yields will elevate ALL asset prices, consumers will not have the disposable income to spend on services offered by most big growth names - They will not be purchasing the $121k Tesla (an ARKK holding) Model X and instead opt for the comparable Mercedes GLC at $54k. They will trim down entertainment subscriptions like Netflix, Hulu, Roku (an ARKK holding), Disney+, etc. They will spend less time shopping online, reducing the need for services like Square (an ARKK holding) - Too much income will be required for food, gas, shelter, and clothing. I know these names don’t rely on earnings and instead on “total addressable market” and “network effects”, but these metrics ultimately require ample economic activity to justify.
In such an atmosphere, Demand for a true inflation hedge will manifest. Crypto is superior to gold at subverting authority (something I write about here) but it's no safe haven, and folks struggling financially will not be able to stomach the volatility. Crypto outflows may be another boon for gold.
I’m not sure when the market will come to this realization. The prevailing assumption seems to be that the recession will cure inflation, but again, the recent Eurodollar pivot has been driven by economic output data - not inflation (which remains at 40 year highs). This said, it may take another elevated CPI print for this to set in.
I took out some call options on GDXJ. Historically, July is a good month for stocks so the timing was hard to pass up. Then again, the Fed may “break something” in the meantime so I’m maintaining majority cash.
Rising Interest Rates Are Revealing the True Damage Done by the Fed
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.
Rate Hike Incoming
The near certainty of another 50-bps rate hike at the Federal Open Market Committee (FOMC) next week forces us to consider the monetary system in which we find ourselves; whereby currency debasement is a useful economic tool, that is until it becomes detrimental, which according to the Fed, can only be cured by rate increases.
Let’s see what the planners have been saying regarding next Wednesday's announcement. CNBC reports that Cleveland Fed President Loretta Mester claims:
…she doesn’t see ample evidence that inflation has peaked and thus is on board with supporting a series of aggressive interest rate increases.
Clearly, more pain lies ahead. Elaborating on this, she provides the following quote:
I don’t want to declare victory on inflation before I see really compelling evidence that our actions are beginning to do the work in bringing down demand in better balance with aggregate supply.
According to her, the June, July, and September meetings could see a 50-bps rate hike and that a pause on rate hikes is unlikely.
Not alone in that sentiment, San Francisco Fed President Mary Daly supports diligently raising rates until “inflation comes down to a reasonable level,” going to say:
We need to do that expeditiously, and I see a couple of 50 basis point hikes immediately in the next couple of meetings to get there… Then we need to look around and see what else is going on.
It’s unclear what she means by “what else is going on,” but it could be a recession, stock market crash, or a housing market collapse…
The Fed’s second in command also gave insight on what our future holds. Fed Vice Chair Lael Brainard said it’s unlikely the Fed will break its rate hiking cycle “anytime soon.” Strangely confident about the state of the economy, she was quoted:
We’re certainly going to do what is necessary to bring inflation back down… That’s our No. 1 challenge right now. We are starting from a position of strength. The economy has a lot of momentum.
Between the three of them and the latest FOMC minutes, which echoed similar sentiment, the world is expecting more rate hikes for the foreseeable future. Of course, it’s not without its challenges. Talk of a recession has been aggressively making headlines. As CNBC explains, data from the Atlanta Fed showed this could be “the second quarter of negative growth,” the official marker of a recession. Reiterating:
…the economy doesn’t have much further to go before it slides into what many consider a recession.
However, CNBC was quick to explain that:
To be sure, while the notion of two consecutive negative GDP quarters is often considered a recession, that’s not necessarily true… However, there has never been a period with consecutive negative-growth quarters that did not entail a recession, according to data going back to 1947.
Where the members of the Fed see strength, others see great weakness. With rates raising next week and the balance sheet finally set to shrink this month, it will be interesting to see how the markets and GDP figures fare in the months ahead.
With today’s Consumer Price Index (CPI) reaching 8.6% for the month of May, we must also wonder just how high will they raise rates to fight inflation readings, and how many rate increases can this so-called strong economy take before it implodes?
Realism, Liberalism, and Constructivism: A Primer on International Relations Theory
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.
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 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.
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.
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.
Russia's Invasion of Ukraine Is Creating a Financial World War
Over a month after Russia invaded Ukraine, the military conflict has remained a regional conflict. While Russia has been able to fortify its claim in eastern Ukraine and has made advances in the south, recent counteroffenses by the Ukrainians have pushed Vladimir Putin’s military away from Kyiv. Meanwhile, allegations of war crimes committed by Russian forces during the conflict have given Ukrainian president Volodymyr Zelenskyy new ammo in his campaign to increase pressure from the international community against the Russian Federation.
The situation on the ground has fueled a narrative popular in America and Europe that Putin vastly underestimated the difficulty of conflict with Ukraine and that the Russian regime is suffering from the “authoritarian trap” of government bureaucrats prioritizing placating their president over accurately reporting the state of Russia’s military affairs. While any degree to which Russian military failures push the countries to a ceasefire is a cause of celebration, overestimating Russian weakness could serve to undermine peace negotiations. Hopefully, the United States and the North Atlantic Treaty Organization’s analysis of this conflict is better than it has been in other situations in recent history.
Putin’s aspirations, however, go well beyond territorial conquest in former Soviet nations. At its core, the aim of the Russian regime is to challenge the post–Cold War order of a unipolar America-dominated global order.
On that front, Russia’s actions—and the West’s response—have now sparked a global conflict.
Since the 1970s, the dollar has been as vital a tool for American global supremacy as any military weapon. America’s war on terror not only transformed the Middle East into the main theater of US foreign policy but fueled Washington’s desire to militarize the American financial sector. What began as debanking al-Qaeda conspirators evolved into the primary tool used against rogue nations such as Iran and North Korea. In recent years, Western nations have also wielded these tools against domestic political dissidents.
In response to Putin’s aggression against Ukraine, America and the West have responded with some of the most extreme sanctions yet deployed. While these measures have forced severe financial pain on Russian oligarchs, who had become used to a certain quality of life outside of their homeland, Russia’s own counteroffensive is revealing the limits to Washington’s favorite weapons.
Global demand for Russian energy, food, and other vital resources has allowed Putin’s regime to provide support to the ruble by demanding purchases be made in Russia’s currency—Putin’s investments in various European “green” causes were well made. The result has been the value of the ruble returning to its postwar standing and stabilizing a financial sector bearing the brunt of Western sanctions.
What should concern the Washington regime the most, however, has been the geopolitical response to the West’s actions. The Russian government has created a list of “friendly” and “unfriendly” countries, leveraging access to its commodities in exchange for neutrality over the Ukrainian conflict. The Kremlin’s response has been supported by the West’s own increasingly aggressive positions towards countries willing to prioritize the interests of Ukraine over that of their own people. The result has been an increasing number of significant, non-European countries refusing to submit to the demands of the Biden regime.
Countries like Mexico, Brazil, and India—all led by nationalist political leaders—have refused to sanction Russia, providing economic support to Putin beyond his handshake agreement with the Chinese Communist Party. In fact, opposition to Washington’s demand for these nations to sacrifice their economic ties with Russia in order to morally condemn Russia has succeeded in bridging geopolitical rivals. Pakistani prime minister Imran Khan praised President Narendra Modi for the India’s “independent” foreign policy.
As a Pakistani news site reported:
"They (India) are saying they will import Russian oil because it is better for their people despite the sanctions [on Russia]."
[Kahn] said he had the "same problem".
As Ryan McMaken noted recently on the Wire, Washington’s military adventurism over the past two decades has greatly eroded America’s claims to a moral high ground. The same is true of Washington’s increasingly aggressive abuse of the privilege of having the global reserve currency. A prominent central banker warned that the US’s continual weaponization of the dollar demonstrates a need for the global community to find something new.
This call came not from the Bank of Russia or the Bank of China, but the Bank of England—one of Washington’s closest allies. In the past month, we’ve seen a historical alternative, gold, enjoy renewed attention as a strategic asset.
The new phase of the West’s financial war is succeeding in bringing together a new coalition of global powers—many with long-standing historical disagreements—who are unified in their opposition to submitting to the edicts of Washington. Additionally, the economic impact of global economic disruption—currently being felt in gas and fertilizer prices and to be felt in the future with food shortages—is now causing social unrest. Politically, the nation of Hungary overwhelmingly reelected nationalist Viktor Orbán against the demands of the European Union and the Biden administration, while polling shows France’s Emmanuel Macron now trailing EU-skeptic Marine Le Pen.
Over a month into the conflict, it remains to be seen whether or not Vladimir Putin will achieve his military goals in Ukraine.
Increasingly, however, it appears he may have achieved his larger aim of overthrowing the unipolar world. Yet another failure of Washington’s technocratic class.
Raise Rates to Fight Inflation?
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:
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.
Recommitting To a Much Older Resolution
As Americans transition into 2022, many people will consider making New Year’s resolutions. If history is any guide, however, little of their focus will be on addressing the cognitive dissonance between personal resolutions to be good and do good for others and the many political resolutions to harm others to feather one’s own nest that always attract substantial support. Such reflection might benefit us by improving both our personal and political behavior. So perhaps what we could use are new years’ resolutions to recommit ourselves to wisdom we seem to have forgotten.
A good example comes from Leonard Read’s “To Each His Own,” written over a half century ago in his Accent on the Right. Its focus was that the biggest problems that arise with government, as well as some of the biggest problems we face as individuals, trace back to violating the commandments not to covet and not to steal, because coveting provides the impetus for seeking to benefit ourselves at others’ expense and stealing is the action triggered by that covetousness.
The prevention of such violations is a central task of government, which can advance the general welfare by more effectively protecting all of our property from invasions by others, which better enables all the voluntary relationships property rights make possible. This is illustrated by the few enumerated functions of our federal government (e.g., national defense is protection of you and your property from foreigners), as well as the traditional functions of state and local governments (e.g., police, courts and prisons provide similar protection from your neighbors’ violations). But unfortunately, government has become a supposedly “respectable” way to violate what its job is to defend.
Consider Leonard Read’s insights into the importance of those two commandments for the existence of, or advances in, real civilization.
THOU shalt not steal! To know that stealing is wrong…implies knowledge of an alternative that is right…to each his own, usually referred to as private ownership. The ancient taboo against stealing presupposes that an individual has a right to the fruits of his own labor.
Recognizing as evil the taking of that which belongs to another certainly antedated The Decalogue by many centuries.
There is every reason to believe that the observance of this taboo, this respect for the principle of private ownership, marked the dawn of civilization. Whether this thou-shalt-not is honored or breached primarily determines the rise or fall of civilization.
True, “thou shalt not covet” is even more basic than “thou shalt not steal”; if no one coveted the possessions of another, there would be no thievery.
To refrain from stealing is the genesis of civilizations!...First, civilizations rise and fall with the rise and fall of individual freedom. Second, individual freedom rises and falls to the degree that private ownership--the absence of stealing--is respected and adhered to. Individual freedom is out of the question wherever and whenever private ownership does not prevail!
Creative outbursts--the mark of civilization--bear a direct correlation with increase in individual freedom.
This private ownership thesis rests, fundamentally, on [the] assumption…that one person has as much right to his life as any other. If an individual has a right to his life, it logically follows that he has an equal right to sustain his life, the sustenance of life being the fruit of one’s own labor or what can be obtained for it in peaceful exchange.
Not to steal is to respect life; it is to endorse and to hold sacrosanct the institution of private ownership.
No civilization could be born without the observance of this taboo. The institution of private ownership--to each his own--has spawned all civilizations!
Were [thievery] the general practice, we would quickly descend into another dark age. A resort to law would be useless; the gendarmerie also would be thieves!
While the institution of private ownership has been given lip service over the centuries, by the people and governments alike, actual observance has been more of form than of substance.
Few among us understand that private ownership can be universally endorsed in principle and completely obliterated in practice. Nor is it widely understood that the forcible taking of income, beyond that required for the principled functions of government, has the same eroding effects on private ownership as stealing. Legalizing the compulsory transfer of control still amounts to the destruction of private ownership.
Realize that individual freedom and, thus, the flowering of civilization are possible only where private ownership prevails. Merely imagine owning absolutely nothing required for your own livelihood. Your life would be in the hands of others.
Leonard Read saw the twin sins of coveting and theft as the greatest threats to real civilization. The latter, motivated by the former, undermines the fundamental basis of the voluntary arrangements that create civilization--private property. As a result, he recognized that the essential function of government was to maintain the principle of “to each his own,” and that any time government fails to defend that principle from others’ invasions, or itself commits such infringements, it impedes rather than advances civilization. That is “a fundamental maxim for civilized men,” reflected in the unalienable rights of our Declaration of Independence, a “new world” resolution that was to define American government. Supporting that far older resolution, increasingly violated rather than followed, would make an excellent resolution for the new year.
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