Craig Pirrong's Blog, page 18

Prigozhin F’d Up: He Trusted Putin.

Last week Russian warlord/PMC impresario Yevgeny Prizoghin met his demise, as his plane plummeted from the skies near Tver, killing him and several other high ranking Wagner personnel.

Two theories of the cause of the takedown of his aircraft (it is not a crash, per se) are in play: (1) his Embraer corporate jet was taken down by SAMs, or (2) a bomb was planted on the plane and detonated in flight.

The second theory has been pushed by Russian sources, which is reason enough to discard it. When the theory was first advanced, skeptics pointed out that the plane fell with the fuselage intact but minus a wing, whereas a bomb in the passenger or cargo compartments would have seriously damaged the fuselage. The Russian sources then pivoted to say the bomb had been planted in the wheel well, located in the wing, which would explain its loss. Subsequent photos of the detached wing show it to be intact, however,and crucially, the landing gear and tire are pristine and bear no signs of fire or explosion.

Support for the first theory comes from (1) the observation of smoke or vapor trails pointing skyward in videos of the plane’s descent, and (2) photographs of plane pieces with many small holes, characteristic of the shrapnel jettisoned with the explosion of a SAM warhead. (FWIW, there are rumors that the corpses of the victims also contained shrapnel wounds.). It should also be noted that the takedown occurred close to a military base at Tver where SAMs are stationed.

So I’m strongly leaning towards the shoot down theory.

So whodunit, and why? Well, of course the near lock primary suspect is Putin. Prigozhin’s/Wagner’s Kornilov moment exactly two months before Yevgeny et al bit the dust was a threat to Putin, and worse, an insult (despite Progozhin’s protests he wasn’t targeting Putin) led virtually everyone to believe he was a dead man walking. The only question was how? Tea that would break a Geiger Counter? A window? “Suicide”?

Indeed, the most confusing thing about the entire episode is that not only did Prigozhin live so long, he was apparently traveling to, from, and within Russia with impunity. This led some to hypothesize that the entire June “coup” was some sort of scheme drawn up by Putin and Prigozhin, others to conjecture that Putin was too intimidated to move against him.

Or more likely, Putin figured revenge is a dish best served cold. And further, he needed to destroy not one man, but to decapitate Wagner altogether–and Prigozhin and his confederates did not provide the opportunity to do so until they boarded the plane this week.

One can only consider Prigozhin as a fool. He fucked up–he trusted Putin.

He was also a fool because he forgot the old adage–if you strike at the king, you must kill him. By recoiling at the last minute, he sealed his fate.

Now of course we’ll never know if Putin gave an explicit order. Perhaps it was a hint, hint, nudge, nudge will no one rid me of this turbulent boyar kind of thing. But it’s extremely unlikely that this happened without Putin’s approval.

Of course, like Murder on the Orient Express, many had a motive to kill Prigozhin. Most notably the Defense Minister Shoigu and the Armed Forces Commander Gerasimov, both of whom Prigozhin had attacked furiously and whose removal he demanded. But I seriously doubt they have the stones to do something like this on their own hook. Indeed, their sad-sackiness is exactly what drove Prigozhin nuts and which endears them to Putin.

What now? The hardcore nationalist factions in Russia are furious, and Wagner rank-and-file could pose a threat. But they are leaderless, and no doubt the FSB and GRU are sweeping up and eliminating the most dangerous of them. No doubt some hardcore elements will survive, perhaps fleeing to Africa, and attempt to move against Putin a la how French paratrooper veterans of Algeria tried to snuff De Gaulle. But the very public De Gaulle represented a much easier target than the reclusive Putin, and even then the disgruntled French soldiers failed in their attempts.

Presumably the event has also scared straight anybody else thinking of mounting a challenge against Putin. Indeed, the very extravagance of the killing–much more lurid than a mere fall from a high place–puts an exclamation point on the assassination, and sends a very strong message.

But it’s not immaterial that Putin felt it necessary to engage in such extravagance and send such a message. A confident leader, like Caesar in many instances, can show mercy. A shaky or fearful one cannot. And perhaps it was the lesson of Caesar that convinced Putin that longtime colleagues can be extremely dangerous. “Et tu Yevgeny” were not words Putin was going to utter, if he could help it. And he could.

The Service Academies: Either Toughen Them Back Up or Close Them Down

As someone who experienced Plebe Summer and Plebe Year at the Naval Academy, and the close relative of someone who did 18 years earlier when both were much tougher, I can say with confidence that those currently in charge of evaluating it, and the programs of the other service academies, are clueless idiots. Why? Consider this:

“The training environment and overall climate at the academies are undermining their ability to prevent harmful behavior,” Elizabeth Foster, executive director of the Pentagon’s Office of Force Resiliency, said Thursday. “Unless some of these more structural and foundational issues are addressed within the training environment, these problems are going to persist.”

What are the “structural and foundational issues”? This:

Each of the service academies uses some form of a “Fourth Class System” where second- or third-year cadets or midshipmen are the primary trainers for incoming freshmen, sometimes referred to as “new cadets” or plebes. But the Pentagon researchers said the older students don’t have the maturity or experience to act as suitable mentors.

And this:

“The peer leadership structure is actually creating unhealthy power dynamics that lead to hazing that further exacerbates this risk,” said Andra Tharp, senior prevention adviser for the Defense Department’s Office of Force Resiliency.

The active-duty military officers assigned to the individual cadet or midshipmen units were often seen more as disciplinarians than mentors, the Pentagon researchers said.

“They didn’t know when or how to prioritize a cadet or midshipman’s well-being over discipline,” Ms. Tharp said

Talk about people unclear on the concept. The system at the academies has nothing to do with “mentorship.” It is about training officers and leaders. The system is set up for learning-by-doing. When you are a plebe, you are learning to take orders, to observe military discipline, and to structure your life in a military environment that is completely alien to the environment in which you grew up. You are also learning to lead by watching others–and in many cases, learning from their mistakes.

And the “hazing”–which is a shadow now of what it was 46 years ago which was already a shadow of what it had been in my uncle’s day–also has a purpose. Several purposes. It helps identify who really wants to be there. It melts the snowflakes who can’t hack it. It provides a jarring separation from your civilian life–which is essential. It tests and develops your ability to think and act under pressure. It reveals and develops your toughness–especially mental toughness.

When you enter the 3rd class (a “Youngster” at Navy, sophomore in the civilian world) you get very modest leadership responsibilities over some plebes. 2d Class, a little more leadership responsibility. 1st Class, a lot more; and among the 1st Class mids/cadets, there is a hierarchy with ranks, with those holding higher ranks having more leadership responsibility. The 1st Class Mids assigned to Plebe Summer duty have a lot of responsibility and influence.

But it is very much learning by doing. And yes, there are good leaders and bad. There are assholes and sadists. There are also some very good ones. And they get to learn and practice leadership before being thrown into active duty where they will have much greater responsibilities. Some learn from their mistakes and get better. Some don’t.

As an extreme example of bad leaders–and bad humans with rank and responsibility–my bête noire in my 2 years at Navy was a guy named Scott Pickles. Yes–real name. He was always trying to bust my balls. I emphasize “trying” because I was repeatedly able to evade his traps, like the time he thought he had caught me red handed wearing civvies in Annapolis, and I pointed him to the reg saying that those with a leave address inside the 7 mile limit (measured from the Chapel Dome) could wear civvies, and telling him to look at my leave chit–which indicated a leave address at St. John’s College across the street from the Academy (where a high school friend attended and in whose room I crashed).

But he evidently had some complex about me, and a few of my buddies, and was always trying to screw with us. (I have theories why.) He was a failure as a leader, and the system at Navy gave him an opportunity to learn and overcome, but he didn’t.

His failure wasn’t due to the system. It was him. His personality. I always thought he was a werido and indeed a sicko, and years later I thought it was a tragedy that my roommate didn’t carry through on his threat to throw Pickles out our 4th story window when the latter threw a tantrum when inspecting our room. Why a tragedy? Because he killed his wife and 3 kids in their sleep after failing as a lawyer. (His outrageous and disgusting acts are why I do not hesitate calling him out by name.)

So yeah. A sicko. If the system failed, it was for not recognizing that he was a sicko.

And that’s the flaw I see in the system. Once you get past 3rd class year, if you keep up your grades and don’t get demerits, they turn you loose on the fleet (or the Army or AF) even if you’ve proved to be a bad human being with toxic leadership traits. Conditioning commissioning on a realistic appraisal of leadership performance, rather than rubber stamping a Scott Pickles with a 2.5 GPA, would turn the alleged liabilities of the system into an asset. You can’t pass “Wires”–you’re gone. The same should hold for demonstrated unfitness for leadership–which the system gives every opportunity to demonstrate.

That would turn the alleged flaws identified by the Pentagon minders into a real strength.

I would also say that being exposed to bad leaders at an academy is valuable training in itself. You will come across bad leaders as an officer. Knowing how to identify them and deal with them is a skill in itself.

And yes, company officers (the commissioned officers referred to in the last quoted paragraph) are in charge of discipline. You can’t realistically “mentor” 100+ mids/cadets, let alone be their therapist and ensure their “well-being.” And again, in the force, your superiors are not going to be your caretaker either: you have to learn a lot of self-reliance, and it’s far better to do that at an academy than when you have a billet that could require sending people to die. Further, the commissioned officers are not supposed to pre-empt the learning-by-doing leadership system.

The very fact that the Pentagon has an Office of Force Resiliency fretting about plebes getting yelled at tells you a lot about today’s US military.

The ostensible reason for these criticisms of the academies is “a ‘disturbing and unacceptable’ recent rise in reported sexual attacks and sexual harassment at the nation’s leading service academies.” The Pentagon fretters claim that this is due to the nature of the training system.

I will definitely not minimize the severity of sexual assault. But I have to say that this assertion of a causal link is almost wholly unsubstantiated, at least based on this article. Women have been at the academies since 1976-7. If anything, the environment was more “toxic” (by the fretters’ definition) then than now–as I can personally attest. So how could the system cause a “recent rise” in such (reported) incidents? When a background condition remains the same or gets better, it is not plausible to attribute changes in other variables to it.

I therefore think that the fretters have totally misdiagnosed the problem, and hence are recommending a quack cure.

I am also curious about how recent is recent. Like, did it coincide with COVID, when life at the academies was much more restrictive, mids/cadets were in much more constant contact than before, normal stress relieving activities–and fun activities–were almost eliminated, and life in general (for everyone, not just academy students) was highly stressful?

Also, what is the control group here? I recollect that there are also claims of increasing rates of reported sexual assault and harassment at civilian colleges and universities, which could reflect a higher incidence, or a greater willingness to report, or both. Are the academies outliers relative to these? Or is this reflective of broader social trends, unrelated to venerable academy training regimens?

Look. I obviously didn’t find a career as a naval officer attractive–I punched out of the Academy after my 3rd class year, despite the attempt of the Superintendent (a 3 star admiral and Medal of Honor winner, William P. Lawrence) to talk me out of it. I put up with the Mickey Mouse, but I understood the point. I learned from it. The Office of Force Resiliency, not so much.

I actually think the choice is binary. Either retain the existing system (and even revert to the way it was years ago, rather than softening it more than it has been softened already), or closing the academies altogether. I think a strong case can be made for the latter option. That case is all the stronger if the fretters get their way. The system they envisage is basically ROTC with uniforms 24/7, at a vastly higher cost. What’s the point of that?

The Sorcerer’s Apprentices of the Ruling Classes

A current topic of debate by allegedly serious people in Germany is whether to ban Alternative for Germany (AfD), a nationalist political party which has been surging in opinion polls. Surging to such an extent that it currently out-polls the ruling Social Democrats and is in shouting range of the Christian Democrats. Those mooting the ban include Thomas Haldenwang, the head of the Federal Office for the Protection of the Constitution and German president Frank-Walter Steinmeier. These elite worthies label the AfD as extremist, enemies of the constitution, and threats to democracy.

The utter moral panic is palpable.

The irony of banning a political party in the name of “democracy” is beyond obvious.

Midwits defending a ban make arguments like, well, the Nazis came to power by democratic means, so it is necessary to protect democracy against the new Nazis–which they obviously believe the AfD to be.

This is historical idiocy. For one thing, the Nazis were declining in popularity when Hitler was invited by German President Paul von Hindenburg to become Chancellor, at the behest of Franz von Papen. Von Papen was a member of the conservative elite, which despaired of defeating the left without the Nazi base. He came up with the brilliant plan of bringing the Nazis into the government on the theory that the conservative elite would dominate Hitler and use him: “We’ve hired him” von Papen told Hindenberg.

Yeah, that worked out great!

Moreover, Hindenburg had to exercise his emergency powers under the Weimar Constitution to install Hitler as Chancellor since the Nazis did not have a majority or a majority coalition in the Reichstag. Again, he did so under the theory that by doing so he would prevent the left from obtaining power and install a puppet that his minority faction could control.

So no, the Nazis did not take power by democratic means. They had a considerable voting bloc, yes, but it was the arrogant and blundering machinations of a faction of the German elite that put them in power.

Soon thereafter, Hitler ran roughshod over those who thought he was their hireling. One of his first acts, in the aftermath of the Reichstag Fire, was to persuade Hindenburg to issue the Reichstag Fire Decree which suspended most civil liberties. This was followed by the passage of the Enabling Act that effectively allowed Hitler to rule by decree, and which ultimately resulted in . . . the effective banning of all political parties other than the Nazis.

More irony for you.

Other historical facts fundamentally differentiate the AfD from the Nazis. The Nazis had a vast paramilitary organization (the SA, and the SS, which was much smaller when Hitler took power) that could intimidate opponents and carry out violence against those that posed a political threat to the Party: the AfD does not. The Nazis obviously had a mesmerizing and messianic leader who attracted a mass personal following. The AfD does not.

The AfD are not my cup of tea, in large part because they are anti-American, although I can understand and sympathize with some of the positions that have made them a political force, namely their anti-EU stance, and their anger over the immigration policies that Merkel and the German political elite forced on the country.

But that’s neither here nor there. What’s particularly fascinating about this to me is how it validates something I pointed out before the 2016 election in the United States, namely, the utter inability of the western “elite” to comprehend–or even consider the possibility–that they created the thing that now terrifies them to the point of wanting to ban it.

AfD’s popularity is due completely to the failure of the German ruling class of all parties–SPD, CDU, Greens. Or maybe not its failure, but it’s Borat-like success of imposing its will despite popular opposition, and its demonization and cancelation of those who express their dissatisfaction.

In other words, the German establishment is reaping what it has sown, and doesn’t like it one bit. But instead of stepping back and asking why supposed Nazis have re-emerged in modern Germany, and considering whether maybe, just maybe, the enemy is them, and that they are primarily responsible for this malign development, they presume their righteousness and react by attempting to demonize and crush what they have created, Sorcerer’s Apprentice-like.

And again, this is not a phenomenon unique to Germany. It is ubiquitous in the west, where populist fires lit by the ruling classes are burning, and the ruling classes cannot even countenance the thought they they are the arsonists.

The Trump phenomenon in the US is one example. Brexit in the UK. (Both of these were prominent in my 2016 post.) But not just them. Look at France (Le Pen) or the Netherlands (Farmers’ Party) or Meloni in Italy.

Or Melei in Argentina. This clip is wildly entertaining, but not just for Melei’s volcanic rant or his Austin-Powers-Meets-the-Late Elvis hairdo: the look on the interviewer’s face is priceless:

“Argentinian Trump” Presidential candidate Javier Milei leaves reporter in STUNNED silence— WATCH

REPORTER: "Why do you call Leftists shit?"

MILEI: "BECAUSE THEY ARE SHIT!”

REPORTER: ?

MILEI: “If you think differently they will kill you!”

pic.twitter.com/rybDuYtZN3

— Benny Johnson (@bennyjohnson) August 17, 2023

A smaller example is the freak out over “Oliver Anthony” (real name Christopher Anthony Lunsford), whose “Rich Men North of Richmond” dominates iTunes –along with several of his other songs. Anthony’s (who would be a spitting image of me at his age if he was about 15 lbs. lighter–I mean, a near doppelgänger) success has caused a moral meltdown among the establishment. Yes, the left in particular, but also the elitist right (e.g., National Review).

Again, the Other frightens these people no end, but they cannot come to grips with the fact that the Other is a reaction to them, 10000 percent.

In a typically supercilious and condescending way, New York Times columnist David Brooks (whom I have a vague recollection of encountering a few times during our shared time at the University of Chicago) tiptoed up to the precipice and looked over. But in the end he chooses to be a “card-carrying member of his class” (his words).

The populist forces shaking virtually the entire west will not abate until the ruling classes engage in self-reflection, self-criticism, and humility. But that is not in their nature. They KNOW they are better than you, and if you disagree with them that’s because you are the unwashed reprobate who doesn’t know his/her place. Which means that the populist backlash will not abate. Especially in Jacksonian America.

And when it does not abate, authoritarian responses are inevitable. Germany’s serious consideration of banning the AfD is just the harbinger of such responses. And that will look mild compared to what is brewing in the United States. The Sorcerer’s Apprentices of our ruling classes have unleashed forces that they cannot control, and are indeed redoubling their spells. Chaos is inevitable.

Why China is Shtupped: A Synthesis

Something of a kerfuffle has broken out over the issue of China’s economic angst. On one side is Adam Posen, who in a Foreign Affairs article attributes China’s current predicament to the reluctance of private firms to invest, which he in turn attributes to their fears that an authoritarian regime like Xi’s will not respect their property rights and may expropriate them. On the other side, Adam Tooze (on Substack) and Michael Pettis (on X or Twitter or whatever) claim no, China’s problems are the consequences of fundamental structural imbalances dating back years, and rooted in pre-Xi economic policies.

All of them are right in parts, and wrong in parts. I assert my post of the other day synthesizes the right parts

It’s perhaps convenient to boil things down thus:

What mess does China find itself in?How did it get into this mess?What prospects does it have to get out of this mess?

Pettis and Tooze (and others, including me and not just the other day) attribute China’s current mess as the result of huge imbalances (over-investment, underconsumption) and secular demographic problems compounded by a very weak social safety net.

It got into this mess as the result of a development model and associated policies that heavily favored fixed investment (especially in infrastructure and housing financed by debt) and exports, and punished private consumption. The policies involved are myriad, but they can be summarized as central planning without complete government ownership. That is, the direction of even private enterprise was substantially guided by government policies that caused prices to encourage the types of economic activity that the government favored. The hand of the state was very visible indeed in China–something which fanboyz such as Thomas Friedman and too many western CEOs to count waxed rhapsodic about. (To which I should add the incentives faced by government employees at all levels who were rewarded for meeting certain aggregate growth targets that were most easily achieved by borrowing to make fixed investments–high powered incentives can be dangerous, my friends.).

But that model is played out, and was in fact always unsustainable: what’s amazing to me is how long they sustained it. But as Herb Stein said, if something can’t go on forever, it will stop. And that model couldn’t go on forever. It’s stopping time is about now. Hence China’s current distress.

So how to get out? The hydraulic economists who rely primarily on accounting identities (for all my admiration for Pettis’ diagnosis of structural imbalances, he fits that description to a large degree), the answer is: Correct the imbalances! Shift China from an investment focus to a consumption focus!

Well, how, exactly? And that’s where Posen’s critique of Xi-o-nomics–and mine–comes in. Achieving a new balance would require the CCP and the state to reduce their control over the economy. But the authoritarian Xi is hell-bent on increasing the Party’s–and his–control. For the reasons that Posen sets out, and many more besides, Xi’s kontrolle uber alles mentality is inimical to a fundamental structural shift in China’s economy, and especially a shift driven by private enterprise and private consumers, that is, a shift driven from below not from above. And below is the only place it can possibly come from.

So I would say that Pettis and Tooze prevail on the “how did China get into this mess?” issue, Posen on the “how does China get out of this mess (or not)?” issue, and all are largely in agreement in describing the just what the mess is.

The upshot of this synthesis is that China is shtupped. And the concern for those outside of China should be how a shtupped autocrat responds.

Want to Mess With a Warmist’s Head?

Ask him/her (but please inquire about pronouns first!) whether the Hunga Tonga eruption accounts for a significant proportion of this summer’s supposedly historically high temperatures. This puts the warmist on the horns of a dilemma a la the famous meme:

The likely answer you’ll get is no, because the warmist desperately wants to attribute this year’s weather to anthropogenic causes. (NB: weather is climate when it advances their narrative, but isn’t when it doesn’t.). Suggesting a natural driver of warm temperatures this year would undercut that narrative.

But! Unlike terrestrial volcanoes which have an often powerful cooling effect (due to their release of sun reflecting aerosols, especially H2SO4), Hunga Tonga is an undersea volcano: its eruption resulted in the release of substantial quantities of water vapor into the atmosphere. Water vapor is a powerful greenhouse gas.

Therefore, denying the impact of Hunga Tonga on 2023 summer temperatures is. . . wait for it . . . CLIMATE DENIAL! Because this would entail denying that greenhouse gasses materially impact global temperatures.

So if they say “No!” then point at them like Donald Sutherland in Invasion of the Body Snatchers and scream “DENIER!”

On a more serious note, Hunga Tonga does seem to provide a fairly clean natural experiment to measure the climate sensitivity coefficient empirically in a way that does take into account feedbacks. If the amount of water vapor released into the atmosphere can be measured with some accuracy, the forcing can be calculated. Combining this with the measured temperature anomaly is an empirical measure of sensitivity that does not require a layer cake of modeling assumptions about feedback.

But that’s a job for scientists. In the meantime, you can entertain yourself by putting warmists on the hot seat.

Breaking China

Evidence abounds that the Chinese economy is in the midst of a fundamental structural crisis. To which I respond: “It’s about time!”

I say this because I have written for over a decade that the Chinese development model is fundamentally flawed, and that signs of its distress have been emerging for years. My main surprise is that it has taken so long.

Signs abound of fundamental structural defects that cannot be addressed using the means that the CCP has used to extend and pretend for the past decade or so. The Chinese economy did not rebound robustly from the lockdown. Indeed, “flaccid” is a good descriptor of the economic performance in the last year. Despite reported growth estimates of 5 pct annually, it is virtually impossible to reconcile these official figures with more granular measures of economic performance (many of which are less subject to manipulation than top line growth numbers). For example, imports and exports have fallen–a troubling development for a trade-heavy economy.

Other indicators include widespread youth unemployment–especially among urban, educated young adults. A real estate collapse, with property development firms falling like dominoes and property turnover approaching zero. Accelerating debt-to-GDP ratios. Reduced marginal productivity of investment, as proxied by increasing debt per unit of GDP growth. Financial distress among local governments. This is another symptom of the real estate problem, as local revenues are significantly dependent on land sales. The local government troubles really represent a national fiscal crisis because local governments account for a disproportionate share of total government expenditure (and debt) in China. Banks are increasingly shaky due to a deterioration of the credit quality of their loan portfolios.

In the past China has responded to growth recessions with increased stimulus. But the government apparently increasingly realizes that the issues are structural, and that if anything increased stimulus will exacerbate rather than mitigate these problems.

Inside and outside China, there is a growing realization of the deep structural imbalances within China–something that has been obvious (and which I have written about for years) but which are now receiving attention. In particular, the investment intensity of Chinese economic activity, and the concomitant enervation of private consumption is the focus of most post-COVID analyses of the Chinese economy.

These diagnoses are fine as far as they go, but all too often those offering cures for the disease are slaves to economic aggregates and the hydraulic model of how economies work. Aggregate investment too high? Aggregate consumption too low? Well, just shut this valve and open that one and the economic shmoo will flow from investment to consumption. Problem solved! Easy peasy!

No, actually. The imbalances in the Chinese economy are the product of its very structure and most importantly its policy and political infrastructure. There are no valves to open or close, no dials to twiddle, that can alter these imbalances. Change would require a fundamental reordering of the entire Chinese system. Moreover, any fundamental adjustment in the allocation of resources would entail substantial adjustment costs, including the junking of much existing capital and widespread unemployment as people lose jobs in contracting sectors before they can find employment in new ones–not to mention that the human capital accumulated in the present structure is likely to be less than ideally suited for employment in the new consumer sector.

Low consumption and investment intensity are built into the existing system by design, and many of the problems that are metastasizing now are manifestations of this structure. The near absence of a social safety net encourages high savings and low consumption–a phenomenon that is deepened by the since discarded but still relevant One Child Policy that deprived the elderly of their traditional support, namely their children. Moreover, myriad policies have distorted relative prices to favor investment in infrastructure and state-owned enterprises (SOEs).

A salient example is “financial repression” which reduces returns to savings–and interest costs to borrowers, especially capital intensive industries, thereby channeling wealth to them. So what is a middle-aged Chinese person to do when he or she wants to save for old age, but can’t achieve high returns through traditional investments? Well, buy real estate for one–the massive overbuilding of apartments in China (illustrated by the many “ghost cities”) is emblematic of this malinvestment. The periodic proliferation of “wealth management” products offered by banks and other financial intermediaries desperate to secure funding for dodgy loan portfolios is another. I could go on.

These various policies are deeply embedded. They cannot be changed at a whim. And perhaps most crucially, they have created powerful political constituencies who are dependent upon their continuation: think of how many businesses (banks most notably) that would collapse during a fundamental rebalancing. And news flash: individual Chinese citizens/consumers are not a powerful political constituency.

Which brings us to the biggest bull in the China shop: supreme leader Xi Jinping. Xi is a devoted communist ideologue with a cult of personality. Basically Mao with a better haberdasher and hairline.

Xi’s overriding–not to say obsessive–ambition is extending, deepening, and strengthening the control of the CCP over every aspect of Chinese society. A fundamental reordering of the Chinese economy to correct the increasingly unsustainable structural imbalances would require massive decentralization, and a grant of considerable autonomy to Chinese individuals as consumers, investors, and entrepreneurs.

And that is an anathema to Xi.

Add to this Xi’s reading of the history of the Soviet Union. He–not wrongly–attributes the collapse of the USSR to Gorbachev’s attempt to loosen the grip of the state and the party over the economy. Xi is hell-bent on avoiding the same mistake. As a result he is consciously adopting an anti-Gorbachev strategy, and increasing centralization, and the power of the party over the economy. And since he has basically declared le Parti, c’est moi, increasing his power over the economy (not to mention virtually every other aspect of Chinese social life).

This foreshadows a fundamental conflict between economic and political realities. Xi’s political agenda will only exacerbate China’s current structural problems. His “solution” is a version-on-steroids of the source of the problems.

Unlike those who screech “OMG China’s slowdown will reduce world GDP growth,” in some respects (economic respects in particular) I don’t care much one way or the other: I don’t consume Chinese GDP growth (and especially not the official statistics on that growth), and the indirect effects on the US economy don’t trouble me that much.

The reason that I do care is the nexus between the Chinese economy and its foreign policy. I can see this cutting in at least a couple of ways.

On the one had, an economically hobbled and distracted China could turn inward and be more focused on foreign domestic issues than foreign adventurism and dreams of reordering the world to be subservient to Chinese domination and a desire to take revenge on centuries of alleged humiliation by foreigners.

On the other hand, intractable domestic problems can lead a personalist system–and China is clearly that now, in contrast to the more collectivist leadership of the post-Mao, pre-Xi era–to ramp up the foreign adventurism. This is particularly true when the personalist person is a seventy-something guy who wants to cement his place in history by, say, “liberating” Taiwan.

Prudence and an objective reading of Xi leads me to place greater weight on the latter possibility. Prudence, because it is the alternative that poses the greatest threat to the United States. Objective reading because of the Xi-as-anti-Gorbachev phenomenon discussed above. Gorbachev’s rapprochement to the United States was driven in large part by his recognition of the strategic and geopolitical ramifications of the USSR’s deep structural economic problems. A player of the Gorbachev Opposite Game–a fair characterization of Xi–would ramp up tension, rather than attempt to ameliorate it.

Xi is clearly ascendent in China now, but there are palimpsests that suggest discontent beneath the propaganda facade. What does an autocrat facing internal opposition do? He removes them. Note that the recently appointed Chinese foreign minister disappeared–and had much of the evidence of his existence erased: perhaps he’s exploring exciting new opportunities in organ donation! Further, commanders of the People Liberation Army’s strategic rocket forces were also recently replaced. Thus, these moves by Xi could be evidence of a dark star of opposition to Xi’s sun.

Intra-CCP politics were always highly factionalized. Xi has apparently triumphed over all of these factions. But short of Stalinist methods–which Xi has not employed–oppressed factions do not disappear, but take cover and can reemerge given the opportunity.

Alas, Chinese is the riddle, mystery, enigma on steroids–it puts even Russia in the shade in this regard. The United States, and the West generally, have very little insight on what is going on in China. Meaning that economic dislocation in a personalist system ruled by a Han exceptionalist, communism with Chinese characteristics autocrat creates extreme risks for the US and the rest of the non-Chinese world. But to compound the angst, the governing “elite” in the US and its allies is clearly not up to the challenge–and indeed may not even recognize its existence, and/or may be personally compromised in their ability to respond.

Meaning that economic tumult in the Middle Kingdom is fraught with risk for you and me. But China is where it is, and the tumult is inevitable.

A Coda On Benavides Justice

One of the crimes Hunter surely should be on the hook for is violation of the Foreign Agents Registration Act, or FARA.

Now, FARA is a classic example of a Benavides Hammer: it is employed selectively, only against regime enemies (e.g., Paul Manfort, Rudy Giuliani’s partners, associates of Michael Flynn, and now Biden accuser Gal Luft), but never against its friends. Hence, it is a law that should be eliminated. That said, its highly selective application illustrates perfectly the politicization of justice in the United States.

The Luft prosecution is particularly astounding given that (a) it occurred shortly after he leveled accusations against Biden père et fils, and (b) it involved work on behalf of a Chinese company–CEFC–from which Luft received chump change, and Hunter received millions. Indeed, it is the company that Hunter was shaking down when he claimed that his father was sitting at his side. Luft’s crime?: arranging for the placement of an op-ed.

So Luft violated FARA, but Hunter didn’t? Sure! Pull the other one! It plays Jingle Bells!

Of course, a FARA prosecution of Hunter would be particularly threatening to Joe, for it would open doors for questioning whom Hunter was “lobbying.” Can’t have that now, can we?

For My Friends–Everything. For My Enemies–The Law!

This maxim of Peruvian dictator Óscar R. Benavides is now, alas, a fitting description of justice, such as it is, in the United States in 2023. The evidence is everywhere.

It is no more evident than in the contrast between the DoJ’s kid glove treatment of Hunter Biden and its Javert-like pursuit of Trump and anyone remotely in the Trump orbit, no matter how insignificant.

The DoJ negotiated a plea deal with Hunter that was, by the admission of the “prosecutor” himself, unprecedented. In a sneaky move, the DoJ entered into a plea agreement with Biden on tax charges (which were comically light, in view of his conduct), and a parallel diversion agreement on gun charges.

I say sneaky because (a) the diversion agreement was basically a get out of jail card for Biden on any charges, past, present, or future, and (b) the diversion agreement was not directly subject to the judge’s approval.

It was, however, contingent upon her approval of the related plea deal. When she asked whether the diversion agreement basically baptized Hunter, the prosecutor, clearly recognizing how absurd the deal would appear if he answered truthfully, said no. At which point Hunter’s attorney lost his shit and said the deal was off.

But for the judge’s curiosity, Hunter would have skated. He supposedly went home to LA “crestfallen.” Well, wouldn’t you be? After all, after the deal imploded like a Titan submersible and Hunter was forced to plead not guilty, the judge ordered Biden to abstain from drugs and alcohol. Oh! The humanity!

You'd be crestfallen too if you were ordered off the drugs and booze!

Crestfallen Hunter Biden flies home in private jet with cameras in tow after his sweetheart plea deal shockingly collapses https://t.co/TCdS4TtlCE via @nypost

— streetwiseprof (@streetwiseprof) July 30, 2023

Hunter and his flacks apparently forgot the Chicago Way: for a fix to work, the judge has to be in on the fix! Duh! (Cf. Operation Greylord.)

Hunter should have hired a First Ward lawyer. Maybe he plans to sue for legal malpractice.

Speaking of legal malpractice, one of Hunter’s lawyers allegedly contacted the judge’s clerk, representing herself as the staffer of a Republican congressman who had submitted an amicus brief containing documentation of the true scale and scope of Hunter’s misconduct. The lawyer persuaded the clerk that the documentation had been submitted in error, and should be removed from the docket. The clerk complied.

When the congressman found out, he lost it. A kerfuffle ensued. The judge demanded an explanation. Biden’s defense team said it was a “miscommunication.”

Miscommunication my ass.

The judge has barred future communication with the clerk, but I guarantee if it had been your lawyers, and not Hunter’s lawyers from a white shoe firm like Latham and Watkins, disbarment proceedings would have commenced apace.

But it gets better! Saturday–yes, Saturday–DoJ lawyers requested that a judge execute orders to imprison Hunter’s (and TBH, Joe’s) former business partner Devon Archer. Why the haste?

Well, not to be all cynical or anything–heaven forfend!–but Devon is scheduled to spill the beans on Joe’s complicity with Hunter’s dirty foreign dealings before a House committee tomorrow.

How mafia-like is that? (I emphasized “Saturday” because off-hours work is not the DC way: I’ve often said the the most dangerous place in the world is in front of a federal office at 5:01 PM. At least it was pre-COVID when they actually did show up for work.)

The DoJ’s uncharacteristically generous deal to Hunter

and its haste to jail Archer are clearly intended to protect Joe. I mean, it is beyond obvious that Jose was at the center of the web of shell companies that Hunter wove over the years. And what did Hunter have to offer Ukrainian, Russian, Romanian, and Chinese crooks other than access to Joe? Stevie Wonder and Ray Charles could see the connection.

Further, Joe miraculously received $9,490,857 from one LLC (CapriCeltic) during 11 months in 2017, and $557,882 from another (Giacoppa) in 9 months.

Mind you, 2017 was the first year of operation of these “companies.” Some startups! Unicorns for sure, right?

Please tell me why in the name of God no one can ask these simple questions of Biden or even his pathetic hacks, the clownish Karine Jean-Pierre and the oleaginous John Kirby?:

What activities did Capri Celtic and Giacoppa engage in? What was the total income of these companies in 2017? In subsequent years?What did Joe Biden do to “earn” over $10 million from these “companies”? Did he invest? How much? When? Did he provide services? What services? When? (NB: this income was received almost immediately after his term as VP ended.). Who were the other beneficiaries of these companies? How much were they paid? For what?

This is not complicated. Just open the books.

But nobody in DC–least of all the “democracy dies in darkness” crowd in the media–is asking for this basic, basic information.

This whole charade has deeply, deeply discredited the DoJ, especially when it is contrasted with its zeal in other prosecutions. (Hint, hint: nudge, nudge.)

It is clear that the DoJ operates under the Benavides Rules. Everything for Biden, his family, and the Democrats: the federal law, in all its draconian terror, for its enemies.

Deflated Thinking on Inflation

When inflation reared its ugly head in 2021, the administration, and various running dog economists, pronounced that it was “transitory.” Then in a defeat for Team Transitory, it lasted for months and months, before beginning to abate in recent months. But now TT is declaring victory–“See! It was transitory after all! It just lasted a little longer than we expected.” (Redolent of “two weeks to flatten the curve”, no?)

No, actually. This reflects the sloppy thinking about and descriptions of inflation.

This is something of a pet peeve of mine, probably originating from a standard Chicago econ prelim exam question back in the day (when inflation was last a big deal) about the difference between a one-time increase in the price level and inflation.

The argument that the transitory people (read that how you wish!) made was that the spike in prices in 2021 was due to an adverse supply shock–a shift of the aggregate supply curve to the left, for you Keynesian types–due to COVID. Once the supply shock ended, they said, inflation would end.

Wrong! The end of the supposed supply shock should have caused the AS curve to shift back to the right, leading not just to an end of inflation, but an actual decrease in the price level, i.e., a deflationary period. That is, the supply shock should have led to a one time increase in the price level (smeared out over time due to price stickiness) followed by a one time decrease in the price level (smeared out over time due to price stickiness.) with the price level ending up roughly equal to its pre-shock level.

An increase in the price level, followed by an abatement in the rate of increase but no decline in the price level–which is what we have experience recently–is contrary to the predictions of the mental model that TT relied on. We have had a permanent increase in the price level.

The pattern we have observed is in fact much more in keeping with the predictions of the Fiscal Theory of the Price Level (developed initially by Thomas Sargent: advanced students can tackle John Cochrane’s recent excellent book on the subject–great timing, John!)–something that the administration and its acolytes are desperate to deny. In that theory, a large increase in government expenditure–like that which occurred during the COVID policy botch, and a whole-of-government botch it was–unaccompanied by a belief that the government would run larger surpluses in the future to pay for it, leads to a permanent increase in the price level. That is, government spending excess caused the large and permanent increases in prices.

In a model with completely flexible prices and one-period government debt, the price level jumps up at the time of the fiscal shock and stays there. In a more realistic model with sticky prices and long-term government debt, the increase in the price level is spread out over time, leading to a period of month-on-month inflation, with the rate of inflation damping out as the fiscal shock recedes further into the past and the price level reaches that consistent with the new level of government debt that results from the spending shock.

That’s pretty much what we’ve observed in the past couple of years.

So the good news is that the impact of past policy blunders on the price level is abating. The bad news is that the price level impact has not gone away and will not go away. The worse news is that the deflated thinking about inflation that pervades the conventional wisdom not only fails to understand what the policy error was, but aggressively denies it. Which means that it is all the more likely to be repeated.

The wrong war, at the wrong place, at the wrong time, and with the wrong enemy, 2023 Edition

There is considerable angst over the glacial pace of the Ukrainian counteroffensive. This angst is a product of unrealistic hopes and expectations derived from totally different circumstances.

The unrealistic expectations derived from the stunning success of the Ukrainians last year, around Kharkiv/Kharkov and Kherson. These successes were rooted in Russian errors. The Russians overextended themselves in their initial offensive in 2022, leaving open flanks and exhausted forces that made them extremely vulnerable to Ukrainian attacks. The Russian situation last summer was in many respects comparable to the Ukrainian situation in 2014, when they overextended themselves in pushing at separatist forces, leaving them open to a devastating attack by Russian forces.

(Both episodes remind me of a maxim my mother uttered during one of our many tours of Civil War battlefields (she was a saint to take me on so many): “Nobody ever won a battle, but some people sure lost one.”)

Circumstances are totally different now. The Russians had ample time to dig in extensively, and in particular, sow extensive minefields. It’s a totally different proposition attacking deep, heavily mined defenses than pouncing on the flanks of demoralized, exhausted troops in the open.

The Ukrainians, Zelensky in particular, have been damning the West vitriolically for failure to provide enough of, well, everything. Sorry, but “enough of everything” would really mean deployment of several American heavy divisions, and most importantly, a good chunk of the USAF. American doctrine for attacking prepared defenses involves an extended period of intense air attack to degrade them, followed by assaults by heavy divisions (i.e., divisions other than the 82nd and 101st, and 10th Mountain), supported by continued air attacks and massive artillery.

Not happening in Ukraine. Never was going to happen. Never will happen.

I am a Patton fan, but this quote from the movie is wildly incorrect:

Fixed fortifications, huh? Monuments to the stupidity of man. When mountain ranges and oceans could be overcome anything built by man can be overcome.

As Patton surely knew, history is replete of examples of the power of fixed fortifications. Ironically this statement was made about the fortifications at Metz, which stymied Patton for months. (And it is amusing that in the same film Patton gives a tour of the fortifications of Malta, and describes how the Knights of Malta used them to stop the Turks.)

Given these realities, the Ukrainians have adapted. They are gnawing through some of the minefields (at non-trivial cost), but are also executing WWI-like trench raids to attrit front line units and deep strikes with drones and Western-supplied weapons (notably HIMARS and StormShadow) to undermine Russian logistics.

This has some chance of succeeding–eventually. Chewing a wide enough gap may permit a breakout, with someplace like Tokmak playing the part of St. Lo. Russian reserves and operational mobility are likely inadequate to contain such a breakout–if it can be engineered. With “engineering” being the operative word, because making the gap that could be exploited is first and foremost a combat engineering task.

But nothing will happen quickly, if it happens at all.

In the meantime, both sides are acting like exhausted fighters in a no-holds brawl, with attacks on civilian and infrastructure targets being the equivalent of eye-gouging and ear-biting. The Russian attacks on Ukrainian grain-exporting capacity are the most prominent example of this.

(NB, especially to people like supposed commodities expert Javier Blas. The first thing that pops into the minds of most when attacks on Ukrainian grain-handling infrastructure is wheat. But Ukraine is a much bigger player in corn than wheat.)

And these attacks carry the risk of dramatically escalating the conflict. Today Russia extended its missile attacks westward from Odesa/Odessa to the banks of the Danube, and executed a strike that landed ~100 meters from Romanian territory. That is, Nato territory.

All this raises the question: what’s the point? And I don’t mean the point for Russia and Ukraine, or more particularly their governments. I mean for the interests of the United States.

A strong case can be made that the US has already achieved–courtesy of tens of thousands of Ukrainian lives and tens of billions of American dollars–about all of the conceivable strategic benefits of this war. Courtesy of Putin’s idiocy, Russian military capacity has been (a) dramatically reduced, and (b) shown to have been not that great in the first place. The threat to Europe posed by Russia (which (b) suggests was not that serious in the first place) has been neutered, at the cost of increasing the US’s vulnerability in a more vital theater–Asia. Good strategic thinking should not focus on making the rubble bounce, but should pocket gains in eastern Europe and focus on Asia.

So rather than acceding to Zelensky’s ever greater demands, the message to him should be: take half a loaf, and make a deal. For the sake of your people.

But that is not the attitude of America’s (and most of Europe’s) ruling class. They are monomaniacally focused not just on restoring pre-2014 borders, but crushing Putin and transforming the Russian state. As illustrated by this:

Vladimir Kara-Murza writes: There is only one outcome of this conflict that would be in the interests of the free world, of Ukraine and, ultimately, of the Russian people: resounding defeat for Putin, to be followed by political change in Russia and a Marshall Plan-type international assistance program both to rebuild Ukraine and to help post-Putin Russia build a functioning democracy so that it never again becomes a threat to its own people or its neighbors. That is the only way to make sure Europe can finally become whole, free and at peace — and stay that way.

Sounds great! How is that going to happen, exactly, Vlad baby? Especially the part about “build[ing] a functioning democracy so that it never again becomes a threat to its own people or its neighbors”?

This reminds me of a statement that I saw from China today, about how government policy makers promised to “optimize and adjust policies” in response to the real estate meltdown. Optimization is not a plan–it is an aspiration. Almost to a person the policy establishments in the US and Europe are hooked on a categorically, metaphysically unachievable aspiration and are willing to spend countless lives and dollars in the futile attempt to achieve it.

These people believe in fairy tales. Murderous fairy tales that cannot possibly come true.

In an ironic twist, a war in Europe (not Asia) is now “The wrong war, at the wrong place, at the wrong time, and with the wrong enemy.” (I’m not a big Omar Bradley fan, but he got that one right.) But our policy “elites”–of both parties–are hyper-focused on the wrong war. (Why that is is a story for another, and probably much longer post.)

War and geopolitics require cold-blooded calculations. The cold-blooded calculation for the United States is definitely not to dream of magically transforming a notoriously intractable and autocratic society into Switzerland with nukes. (The possession of nukes in itself making such a transformation wholly fantastical.) It is instead to push for an outcome that satisfies none of the combatants–and indeed infuriates them–and shift focus from eastward to westward. Don’t fight the last war. Prepare for the new one–in order to prevent it.