Power & Market
Oil prices headed upward more rapidly this week, hitting $68 per barrel (WTI), which is the highest price since December 2014.
Even if adjusted for inflation (according to the CPI), oil prices are still near a four-year high.
Trump took to Twitter this week to attempt to blame OPEC for the high prices, stating "Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!"
While OPEC can no doubt take some credit for pushing down production totals, Trump had best look in the mirror if we wants to find another major contributor to the recent rise in prices.
After all, prices haven't exactly been helped downward by the Trump administration's continued promises of ongoing military action in the region. Although Syria is not an oil exporter, interventions that threaten to destabilize the region further aren't a boon for consumers of oil.
Essentially, what we have now is a president who is threatening a war in the Middle East, a trade war with China, and new sanctions against Iran.
An additional potential threat lies with Washington's habit of imposing and expanding sanctions on Russia. As Julian Lee at Bloomberg notes:
President Donald Trump already has Iran in his sights. The clock is ticking -- May 12 is the deadline for him to extend the waiver on sanctions that are suspended by the nuclear deal.
More recently he has turned up pressure on Moscow with a new raft of sanctions aimed at individuals and companies close to President Vladimir Putin.
In December, Russia — which is not a member of OPEC — had reached a deal with OPEC to limit its own production to keep prices up. Faced with uncertainly surrounding sanctions, it seems, Russia is now saying it will keep its options open when it comes to production.
But even if Russia wants to expand production, US sanctions may limit this ability since Russia needs capital to keep production going, and "[d]ue to sanctions and the inability for Russian energy companies to obtain funding in U.S. dollars, Russia often has to turn elsewhere for backing, including costlier Chinese funding."
That could impact total production, and thus drive prices up further.
Given that Russia vies with Saudi Arabia and the US to be the world's top oil producer — It was number 3 in 2017 according to the EIA — policies that lead to cuts in Russian production will lead to higher global prices, all else being equal.
In 2017, Russia provided 12 percent of global production, and Iran is an additional 5 percent.
If Trump were truly concerned about oil prices, he'd brush off continued efforts by Washington interventionists searching for yet more ways to isolate and limit trade with Iran and Russia.
Moreover, openness toward oil-exporting states is all the more important since "[g]lobal oil supply has already been tightened by the OPEC-led supply cuts, and boosted by the collapse in Venezuelan output and drop in Mexican production. The group is nearing "mission accomplished" in draining excess oil inventories."
In other words, if US policy succeeds in limiting production in any countries outside of OPEC — such as Russia — that's only helping OPEC.
As Ellen Wald at Forbes wisely suggested, though, Trump's blaming of OPEC for high prices is a savvy political move since the average America — who knows next to nothing about US sanctions, falling Mexican production, or the situation in Iran — will now associate pain at the pump with OPEC.
We already know that blaming foreigners is a winning political strategy — as with the current brewing trade war against China — so this tactic may work nicely also.
In his ABC interview last Sunday, former FBI chief James Comey boasted endlessly of his devotion to truth, which he said “has to be central to our lives.” Touting his role in bringing down Martha Stewart, he declared, “The truth matters in the criminal justice system.” But, when he was FBI boss from 2013 to 2017, his agency duped the American public whenever convenient.
In 2014, Comey declared that “We do use deception at times to catch crooks, but we are acting responsibly and legally.” His comment was spurred by revelations that an FBI agent had masqueraded as an Associated Press reporter and fabricated an AP story. The Associated Press complained that the FBI’s tactics undermined “the vital distinction between the government and the press," while the Reporters Committee for Freedom of the Press protested that the ruse “creates the appearance that it is not independent of the government.” But Comey declared the technique was “proper and appropriate,” allowing such scams to continue.
The AP charade was chump change compared to the FBI’s next media flim-flam. After a high-profile confrontation between federal agents and Nevadan ranchers in 2014, the FBI created a bogus independent film crew that spent almost a year hounding the Cliven Bundy family and their supporters, taping their comments to propel federal charges against them. The feds eventually arrested and prosecuted Bundy family members.
This past January, federal judge Gloria Navarro dismissed all charges, denouncing “flagrant” and “reckless” misconduct by federal prosecutors. The FBI was exposed for lying for more than three years regarding its deployment of sniper teams around the Bundys’ ranch prior to the Bundys summoning supporters to protect them.
The Justice Department inspector general last month exposed Comey’s arguably deceitful tactics regarding his campaign to outlaw private encryption, which he perennially portrayed as a grave peril to public safety. After a Muslim couple gunned down 14 people in San Bernardino, Calif., the FBI invoked a 1789 law to sway a federal judge to order Apple to write anti-encryption software that would hand the FBI the keys to break into the terrorist’s iPhone (and all other iPhones).
Read the rest at The Hill
When lampooning the various arguments for trade barriers, Murray Rothbard would like to try to use the arguments offered against foreign trade to trade between states themselves.
As he wrote in Making Economic Sense:
The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by high-priced New York or Rhode Island textile manufacturers who would then be complaining about the "unfair," "cheap labor" competition from various low-type "foreigners" from Tennessee or North Carolina, or vice versa.
Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on interstate trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure rip-off of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by less-efficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.
Unfortunately such "absurdity" has been ruled to be the law of the land in Canada. As the National Post reports:
After a legal battle fought all the way to Canada’s highest court, a New Brunswick man’s quest to be able to buy slightly cheaper alcohol in a neighbouring province has failed.
In a unanimous decision handed down Thursday, the Supreme Court of Canada ruled provincial trade barriers are constitutional as long as they’re aimed at a valid purpose within the province’s jurisdiction, with only an incidental effect on trade. Canada’s constitution simply “does not impose absolute free trade across Canada,” it declared....
On its face, the case was about booze. But had the challenge been successful, the precedent could have struck down a massive swath of provincial trade barriers, from agricultural supply management to e-commerce to environmental controls. Crown attorneys from every province had lined up at the Supreme Court to argue against the challenge, with the federal government siding with them.
The ruling declared that allowing “full economic integration” within Canada would “significantly undermine the shape of Canadian federalism, which is built upon regional diversity within a single nation.” Federalism means there must be “space to each province to regulate the economy in a manner that reflects local concerns,” the court ruled.
As Maxime Bernier, a Conservative Member of Parliament and a student of Austrian economics noted, "Sad day for defenders of economic freedom in Canada."
It's amazing what you can find in the Mises digital archives.
Here is a lecture by Ludwig von Mises on Socialism that he gave at the University of Houston. In the audience was a doctor from Lake Jackson, TX. After listening to this talk, he decided to run for Congress.
This was the only time Ron Paul met Mises, as he notes in his book Mises and Austrian Economics: A Personal View.
Because of my interest in individual liberty and the free market, I became closely associated over the years with friends and students of Mises, those who knew the greatness of Mises from a long-term personal friendship with him. My contact, however, was always through his writings, except on one occasion. In 1971, during a busy day in my medical office, I took a long lunch to drive 60 miles to the University of Houston to hear one of the last formal lectures Mises gave—this one on socialism. Although 90 at the time, he was most impressive, and his presentation inspired me to more study of Austrian economics.
Between Mises's Austrian accent and the recording quality of the 70s, it's not the easiest to understand. But still, a very neat piece of history.
Today, Chris Calton kicked-off the third season of his Historical Controversies podcast, which will recount the controversial history of the American Civil War.
If you enjoy the podcast, please leave a positive rating and review.
In no area has President Trump differed more from his campaign rhetoric than the field of monetary policy. Yesterday Trump announced the nominations of Richard Clarida and Michelle Bowman to the Federal Reserve Board of Governors, with the former to fill the role of Vice Chair. Clarida’s nomination in particular illustrates how uninspiring Trump’s appointments have been, as he was a finalist for a Fed governorship under Obama until he withdrew his name from consideration. Interesting enough, doing so resulted in Jay Powell, Trump’s new Fed Chair, to fill the position.
Richard Clarida, a former Bush Treasury official, currently serves as a Columbia University professor and an adviser to Pacific Investment Management Co. He is a New Keynesian who has published a great deal on “Optimal Monetary Policy.” (Guido Zimmerman has an interesting QJAE article on the topic which references some of Clarida’s work.)
In terms of his policy views, he offers an interesting contrast to fellow Marvin Goodfriend – whose nomination has currently been stalled in the Senate. To Clarida’s credit, he reject’s Goodfriend’s support for negative interest rates – going so far as to question their legality for the Fed. In his advisory role at Pimco, his analysis has questioned the effectiveness of contemporary monetary activism. As he co-wrote in a June 2016 analysis:
In recent years we have described “riding a wave” of central bank interventions, as a range of unconventional policies have been rolled out across countries, driving asset price returns. This wave-riding has worked well in the past. Looking out over the secular horizon, however, diminishing returns to central bank interventions – and the potential for policy activism to do more harm than good, notably in the case of negative policy rates – advise against such an approach.
Of course he also differs in one area where Goodfriend is good, the use of the Fed’s balance sheet. Goodfriend has warned that the Fed’s buying of non-Treasury assets, like mortgage backed securities, gets it into the business of allocating capital. Instead, Clarida thought the Fed was too modest in buying up assets following the financial crisis.
Clarida thought the Fed could effectively respond to downturns by committing to buying as many bonds – including mortgage bonds and corporate bonds – as necessary to "cap" interest rates at the levels it wants:
Much of the existing literature either misses entirely or under-appreciates how robust an LSAP [large-scale asset purchase] program can be at lowering bond yields and/or credit spreads...a central bank can everywhere and always put a floor on any nominal asset price (or set of nominal asset prices) for as long as it wants...So long as the central bank is willing to buy an unlimited volume of those bonds (potentially including the entire outstanding stock) at the interest rate it wishes to put a ceiling on, it will succeed. And of course, the above reasoning also applies directly to an Lsap program targeted at corporate bonds or mortgage backed securities.
The Fed successfully capped U.S. government borrowing costs in the 1940s, and this experience was cited by the Fed's staff in mid-2003. While the idea failed to gain traction among American policymakers, the Bank of Japan has successfully used "yield curve control" to limit yields on Japanese government bonds since 2016. Clarida's position in 2010 suggests he would be keen on something similar, perhaps also including mortgage bonds and corporate bonds, should he be at the Fed during the next downturn.
In terms of Fed reform, Clarida is likely to be an ally for House Republicans who have pushed to make the Fed adopt a rules-based monetary policy framework. Clarida has long written about the advantages of a rules-based framework and even has his own “forward-looking” version of the Taylor Rule.
As a voting Fed member, Michelle Bowman will also have an impact on the future of monetary policy – but as far as I can tell she has made no public comment on the subject. Rather than being an economist, she’s an attorney who had a long career as Washington staffer. Her employers include Senator Bob Dole, House Transportation Committee, the House Oversight Committee, FEMA, and Homeland Security Secretary Tom Ridge. Not the best resume for draining the swamp.