Power & Market

If you follow Indian politics, chances are you expect news of political horse trading every major election cycle. Horse trading is the phenomenon of elected representatives switching their party affiliations, often in exchange for money or roles in government. When there are simultaneous elections in several states, and the time that lapses between elections less, the machinery of all our political parties is devoted to churning out strategies for winning. And this makes the partisan system of our politics the elephant in the room, but an invisible one.

Horse trading has been around for as long as Indian democracy, yet we always view it as something that morally corrupts the ideal realm of politics every other season. In reality, it is a result of the incentives created by the institutional structure of our polity.

Partisanship has come to be seen as a default in contemporary politics, but this was not always the case. Moreover, it is not viewed as a source of our political problems per se, because both political action and analysis obscure the incentives that it gives rise to.

In ancient Athens, eligible adult male citizens could vote on laws and contest to lead (though this criterion wasn't ideal). Throughout medieval India, there existed one form or another of republican government, some of which continued into the modern period at smaller levels. When the United States was being formed, the Founding Fathers too wanted to insulate the spirit of republicanism from the tensions inherent in a democratic setup. James Madison famously argued about the threat factionalism posed to citizens’ rights. s

In a republic, the constitution is supposed to place institutional checks on the government and places power with the individual. In a democracy, it is the people, the majority, from whom flows the power to govern and make laws. A democratic system is supposed to supervene upon a republican framework, not overwhelm it.

But once elected, a democratic government may escape the checks placed on it constitutionally. This issue is magnified in the case of India, whose constitution already tilts more towards a unitary state than a federal one. Even China boasts a greater degree of decentralization (albeit with its own set of drawbacks). But primarily, it is the capacity of this democratic ideology to generate partisan political factions that allows it to upend the power given to voters.

First, it is important to wrest the romance associated with democracy and the election process. The way in which people exercise their votes is itself highly opaque and ethically fraught. Several scholars like Garett Jones, Bryan Caplan and Jason Brennan have studied this in detail.

Once we have a nonromantic view, it can be extended to the contestants of the election process. Unlike voters, those who contest for representation end up competing for votes as well as factions/parties. A win/loss in one space sends out corresponding signals in the other. In fact, this is exactly how a democracy draws out and maintains the voter-legislator distinction, which is normatively absent in a republic. 

Horse trading, a metaphor that originated from the untrustworthy market for horses during the so-called Gilded Age in the US, is indicative of the lack of market mechanisms (profit/loss and pricing) to discipline immoral behavior. It is apt for an institutional environment that creates a ‘market’ for politics, but not where it may be useful.

In other words, it is the voting mechanism that needs to be supplemented with improved knowledge, but it is large, powerful political parties that become the principal buyers and sellers. They shape outcomes and trade the stamp of their identity and partisanship with politicians. Often, politicians are not identified by the policies they espouse but by their party-based identities. This completely misses the fact that governance and representation are services provided to citizens, not just marks of social status.

There are two ways to overcome such partisanship: by creating a single party state, and by creating an altogether nonpartisan state. The former requires a strong, authoritarian, top-down structure, which is incompatible with the essential freedoms of individuals. The latter is the way to go forward. Nonpartisan politics do not entail that we get divided into tiny republics. For Madison too, it was the opposite. To go beyond narrow-minded factionalism, one needed to be politically positioned in a larger national sphere. In our times, the challenge he grappled with is even more critical. Polarization and partisanship still loom large, even if they are not dramatically high. But this is exactly the context in which an institutional intervention becomes vital.

This kind of intervention ought to be Hayekian in a sense, as it would be aimed at shifting the rules of the game to make it more conducive to catallactic action. In his famous essay, “The Use of Knowledge in Society,” Hayek cautioned against the seductive power of the belief that civilizational phenomena are produced and maintained through some sort of conscious ordering.

Thus, recognizing the shortcomings of ideological democracy does not go to suggest that the republic is the best political fix. It is to draw attention (especially in the Indian context) to why we constitutionally call ourselves a ‘republic’: to preserve our ability to have an individual political life within the socioeconomic collective, and continuously check the centralizing institutional orientation of democratic politics.

We ought to bend away the channels for partisan tendencies to get concentrated at the top. It is a matter of urgent political reform to reimagine the service of governance as equivalent to any other essential good or service, not as something that sits outside the economy.

The conventional view that compares opportunistic political transactions to greed-infested, bad-faith ‘markets’ gives us a simplistic description, not an analysis of the causes. It presumes that democratic politics exists in an ideal realm, and its flaws are the imperfections of humanity.

On the other hand, the institutional view underlines how, when certain rules of the game have ossified, general economic behavior can have corrupt outcomes. The economist James Buchanan said this best in his 1986 Nobel Prize lecture:

The relevant difference between markets and politics does not lie in the kinds of values/interests that persons pursue, but in the conditions under which they pursue their various interests.

Executive Summary

• In the near term, China’s reopening and buying of ESPO crude would likely erode the role of Brent & energy indices
• Gulf nations envision the scope of petroyuan to be on par with demands for Chinese goods & technology transfer
• Rising yuan payments for Russian energy and more China-Gulf bilateral trade imply future dollar demand decline
• In the long term, more local currency trade settlements would erode dollar flows and Federal Reserve’s influence

China’s yuan denominated Russia crude rivals Saudi imports

In 2021, China imported 79.6 million tons of crude from Russia (1.6 million barrels per day) vs. 87.6 million tons from Saudi Arabia (1.8 million barrels per day). These two producers respectively accounted for 15.5% and 17.1% of China’s total crude import at 513.2 million tons (10.3 million barrels per day), which was near Saudi Arabia’s total 2021 output of 515 million tons. At present demand, China is both Saudi Arabia and Russia’s top energy customer:

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Following the onset of the war in Europe, rising yuan-denominated Russian crude export and omission of Russia’s Eastern Siberia Pacific Ocean (ESPO) grade crude from broader commodity indices would likely erode Brent crude’s role as a global oil benchmark. Investors focusing solely on Brent may overlook key market shifts.

China’s energy demand was subdued in 2021 and 2022 due to pandemic restrictions, and a broader economic reopening would likely accelerate demand for both Russian and Saudi energy products (by 2+ million barrels a day). However, Brent would only reflect part of the demand surge due to ESPO shipment and direct Russo-China pipeline flows. In 2022, sale of Russian pipeline crude to China totaled 33.3 million tons by October (nearly half of Russian flows to China over the period). Given crude pipelines would not use EU or G7 insurance services, the products would trade at uncapped prices into 2023.

Meanwhile, seaborne ESPO crude traded at $79 per barrel in Asian markets after the G7 + EU price cap came into effect at $60 per barrel, because the presence of a Russian tanker fleet that uses its own insurance.

The Bloomberg Commodity Index, as well as its futures instruments, uses WTI and Brent crude to construct its crude constituents, and it would underrepresent energy market developments in Asia if ESPO decouples from Brent:

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Currently, yuan-denominated purchases of Russian crude uses a quasi-barter system: Chinese buyers would settle Russian crude purchases in yuan, and Russia would subsequently use the yuan to purchase Chinese technology products.

This is the same petroyuan model discussed at the China-Saudi Summit.

Saudi-China Summit and long-term impacts

A key market focus on the Saudi-China Summit attended by Crown Prince Bin Salman and President Xi was petroyuan. Xi proposed making “full use of the Shanghai Petroleum and National Gas Exchange as a platform to carry out yuan settlement of oil and gas trade.” A Saudi source previously said a decision to sell small amounts of oil in yuan to China could make sense in order to pay for Chinese imports directly, but “it is not yet the right time” to take the step.

This ambiguous stance preserved policy option for the Kingdom, for the Saudis do not see the yuan as an alternative reserve currency as Russia does. Riyadh, like Hong Kong, pegs its currency to the dollar, and it would require an ample dollar reserve to defend the riyal. As long as this system persists, Saudi Arabia would use petrodollar as a liquidity source, and it would reinvest reserves in interest-bearing dollar-denominated assets such as U.S. Treasury securities or corporate bonds. This supports the dollar and contributes to easier dollar-based financial conditions by boosting dollar asset prices. Ultimately, the petrodollar system plays a role to elevate the Federal Reserve as the dollar system’s central bank that affects global financing costs.

Yet, Saudi Arabia’s willingness to consider a system modeled after yuan-based Russian crude trade reflects its pragmatic considerations: it creates an incentive for Beijing to broaden economic ties with Riyadh. Greater the overall bilateral trade in yuan, greater the Kingdom’s demand for renminbi to pay for Chinese goods and technology, and petroyuan would fulfill a similar purpose as petrodollar to supply Riyadh with a non-dollar invoicing currency.

Overtime, greater the Saudi-China bilateral trade, greater the likelihood of more crude transactions settled in yuan, thus smaller the role of the dollar (and Fed policy) on global asset markets. While petroyuan would hardly replace petrodollar given its limited scope, less dollar in commodity settlement would result in less reinvestment of dollar reserves into dollar assets. This has ramifications from U.S. fiscal policy (less demand for dollar debt) to U.S. fixed income and equity markets.

Combined with India’s work on rupee transactions with Russia, a slow grind toward a multipolar (fragmented) world would likely weaken the dollar and erode existing asset correlation paradigms to create new market opportunities.

In the midterm election, Greater Idaho ballot referendums passed in 2 Oregon counties. Voters have passed ballot referendums in 11 of the 16 Oregon counties that would join Idaho under the current Phase 1 plan.

In May, Greater Idaho ballot referendums narrowly failed in 2 other counties. Greater Idaho would have expanded to the Pacific coast under the previous Phase 1 plan.

Once voters pass the ballot referendums, Oregon and Idaho state legislatures and the USA congress would have to pass bills to change these states’ border.

But another approach would be faster and stronger.

Oregon suburban and rural county legislators should just ratify a county-region constitution. Under a county-region constitution, suburban and rural counties’ residents would delegate state powers to a United Counties of Oregon government.

In a single ratification step in each county, county legislators would hyperlocally carve out a state-level government that’s chosen by majorities of its counties’ residents.

Secede from Progressive state government

In 2020, majorities of voters chose Trump over Biden in 26 of the 36 Oregon counties.

For Oregon’s constitutionalist counties, standing their ground but leaving Progressives behind would be simple. Just as the national Constitution created a United States of America, an exactly-analogous state constitution would create a United Counties of Oregon (UCOR).

Just as state legislatures ratified the USA constitution, county legislatures would ratify the UCOR constitution. The USA constitution became effective when ratified by a 2/3 majority of the states, which was 9 of the 13 states. The UCOR constitution would become effective when ratified by a 2/3 majority of the counties, which would be 24 of the 36 counties.

This would be surgically precise to a highly-useful degree. Metro areas have Progressive urban cores but typically span multiple counties, and different counties’ residents have different political preferences. This is true in Oregon:

• In 2020 in metro Portland, the Multnomah, Washington, and Clackamas County majorities chose Biden, while the Yamhill and Columbia county majorities chose Trump.
• In metro Eugene, the Lane County majority chose Biden. In this case, the Lane County residents who live outside of Eugene’s urban core could choose to leave Eugene's urban core behind to form a separate county.
• In metro Salem, the Marion County majority chose Biden, while the Polk County majority chose Trump.

Secession of freedom-supporting counties from the legacy Oregon state government to form a UCOR government would create for metro residents the freedom to stay in the same metro area but relocate to a freer county. In the new location, residents could still commute to their same jobs, and they would still be near to their local family members and friends. But they would delegate their state-level powers to a much-more-limited state government.

The former-monopoly legacy state government would suddenly have to compete with the adjacent UCOR for residents. Even now, when state residents have to vote with their feet by moving far away, Progressive state governments have been losing such competitions. Given freer choices within Oregon’s own metro areas, the Progressive legacy state government’s losses would accelerate.

At some point the mounting losses of residents and revenues would drive even many Progressives to offer at least some more freedoms. The race to freedom would be on.

Divide and limit all governments

A UCOR constitution modeled on the Constitution and having strong local support would provide a republican form of government:

• The UCOR government would have limited enumerated powers. Power should not be enumerated over schools. Parents as customers would drive needed, rapid improvement. Power should not be enumerated over professions. Customers should be free to buy services as freely as they buy goods. Customers would secure the lifesaving freedom to use existing drugs off-label. Enough customers would learn from professional reviewers, and all service producers would compete for these customers, so all services would improve.
• The UCOR government would have genuinely separated powers—legislative, executive, and judicial—and no delegation of legislative powers. Together, these rules make it illegal to operate rulemaking administrative departments and agencies and to operate administrative courts.
• The UCOR government would provide for enforcement of its rules on the government by having as sanctions various offsetting powers, which in the UCOR would be used. Strong local voter support, demanding accountability, would lead UCOR government people to use their constitutional offsetting powers against anyone in any government jurisdiction who violates a rule. Cumulatively, this would limit all government jurisdictions.

Legislators would just pass simple bills, executives would just sign bills and enforce the resulting laws, and judges would just opine on cases under the resulting laws. With legislators, executives, and judges each doing their own jobs, there would be no openings for staffers, advisors, or bureaucrats. All tradeoffs would get made by legislators and would be fully defined by the laws’ rules and sanctions. Legislators would get some tradeoffs wrong, so then they would just repeal those laws.

In republican-government release 1, the USA’s initially quite-limited government transformed the world. Under the world’s-lowest total taxes in all government jurisdictions, which through 1913 totaled just 4% to 8% of GNP, the USA’s world’s-freest people led the world to previously-unknown prosperity.

Republican-government release 2—constitutionally-limited state government, fanning out like wildfire to enforce constitutional limits throughout our governments—can be rolled out in any county region, at any time.

Constitutionalist Oregon voters keep showing their legislators that freedom matters a lot to them—that freedom decides their votes. Oregon county legislators would do well to listen and lead this simple, giant step up straightaway.

This Christmas, try to remember there’s poverty and then there’s “poverty.” In America millions of people have fallen on hard times as their savings continue to erode due to the government intervention and central bank currency inflation of late. This devastation is sobering, while other countries in the world whose socialism is “more advanced” than America’s face poverty that is difficult to fathom by our standards.

The Zimbabwe Independent tells us about Christmas on the other side of world:

Locals are battling debilitating power cuts of up to 19 hours daily… Poverty levels are deepening and incomes have been eroded…. Foreign currency shortages are deepening and the volatilities that have ravaged the currency for decades are continuing…

As for the festive holiday:

Most Zimbabweans will not have electricity to cook the family Christmas lunches, unless they grudgingly use firewood or gas.

Imagine your average American not having power for up to 19 hours a day, or seeing the purchasing power of their currency decline so much that they must rely on a foreign currency?

A screenshot of Zimbabwe's M1 money supply would tell the story, but no need to share as readers are capable of surmising its exponential growth over the last few years.

Then there is Canada, a country much like America but further “advanced” in its socialism; it's a nation where concepts like “liberty”’ and “freedom” have never woven themselves into the fabric of the nation nor been ingrained in the population. According to Canada’s government owned news channel, the CBC:

Even the price of Christmas trees is up this year, to the tune of 10 per cent, amid a nationwide shortage and higher farming and fuel costs.

According to Canada’s annual food price report, “a typical family will see its food bill climb over $1,000 next year.” In response to this:

…the Bank of Canada raised its key interest rate for the seventh time this year in the fight against inflation — now sitting at 4.25 per cent, its highest point since 2008. 

Meanwhile, in America, Christmas isn’t normal either. CBSNews tells us:

Christmas tree prices had been expected to increase between 5% and 15% this year compared to last year… key holiday dinner items such as turkey, baking products and dairy are up between 15 and 25%.

This holiday season, take just a few moments to consider the lengths governments and central bankers across the world have gone to completely decimate their respective countries. One can bet that across the globe, this will be a Christmas to remember.

Making matters worse, there is no promise of a better next year since the response to the problem remains: central banks increase the money supply, prices go up, and market distortion occurs. Central banks raise rates. Why they continue to look at rates when they should be looking at the money printer is anyone’s guess. And while it’s unclear what the end game is to all of this, if the powers that be want America to look more like Canada initially, and Zimbabwe later, they are taking the right steps.