Power & Market
The idea that billionaires would gather behind closed doors and discuss the fate of the world is no longer conspiracy. The more you read, the more you’ll see. The plans are laid out in plain sight.
Take a look at this chart from the World Economic Forum (WEF) itself. Notice anything strange (hint: top right)?
Central Bank Digital Currency (CBDC) was undoubtedly on the agenda at this years’ meeting in Davos. Here is where one must maintain a keen eye. When they discuss risks surrounding cryptocurrency, like custody, they provide neutral points and maintain an air of uncertainty. Per the chart above, they’re not stating a conclusion, but merely showing how risk is reduced the higher up one goes on the scale.
Self-custody was once the safest way to store your crypto. Looking at this chart, if a central bank offered custody of “your” CBDC, it would offer an even higher measure of security.
They’ll try to convince you by claiming they spent a lot of money, time, and expertise exploring the issue of digital money for the “public’s interest.” Nonetheless, no different than a scientific research paper, we must ask, who funded the project?
Over the past year, an interdisciplinary research team funded by the Bill & Melinda Gates Foundation…
If Bill Gates can influence the future of CBDCs the same way he has the scientific, medical, and drug market, then we’re in for something spectacular in the future.
And this future could be just around the corner. According to one of the experts at the World Economic Forum:
Over the next four years, we should expect to see many central banks decide whether they will use blockchain and distributed ledger technologies to improve their processes and economic welfare.
Four years from now seems a lifetime away, especially when most people in the wealthiest nations on earth are living paycheck to paycheck, struggling with an ever-increasing cost of living, and very little about the future looks promising. Yet, one day, CBDCs will be implemented.
…built a global community of central banks, international organizations and leading blockchain experts to identify and leverage innovations in distributed ledger technologies (DLT) that could help usher in a new age for the global banking system.
The plan is progressing quite nicely too! They have no problem saying:
We are now helping central banks build, pilot and scale innovative policy frameworks for guiding the implementation of DLT, with a focus on central bank digital currencies (CBDCs).
The difficulty is that as of yet, these ideas are still intangible to the public. There is currently no functioning Fedcoin. If we are cashless, it is only by choice. Individuals cannot hold a deposit at the Federal Reserve.
But just because the world looks like this today, doesn’t mean it will look like this tomorrow. Everything the WEF publishes, these meetings in Davos, and whatever the response to the next crisis will be are all designed to move the masses away from liberty, freedom, privacy, security, and autonomy, to be handled by another. They market whatever it is they’re doing as a public service. The reality is anything but. Society has seen this before, many times and in many forms.
Unfortunately, by the time CBDC hits the front page, by the time society has become officially cashless, and by the time you're forced to accept a salary, or pay debts in Fedcoin, held in custody at your local Federal Reserve branch, it will be too late. It’s like waiting for a tornado to touchdown on your front porch; you know it’s coming. It’s just a question of how bad it will be, whether you’ve prepared for it, or whether you’ve left town completely.
As reported by CNBC last week, the Consumer Price Index (CPI) figure of 6.5% shows how the mainstream media disseminates false economic information for consumption by the masses. Try to spot some of the more concerning parts:
Initially, the chart raises questions such as where this data comes from and who participated in the sampling. Once the data was compiled, how did statisticians determine what constitutes the “average” egg, frankfurter, or new vehicle?
In another article, CNBC tries to explain:
CPI is the most closely watched inflation gauge as it takes into account moves in everything from a gallon of gas to a dozen eggs and the cost of airline tickets.
As discussed on multiple occasions, calculating (price) inflation is the Art of Moving the Goal Posts. Consider the impossibility of comparing gas, eggs, and an airline ticket. Adding them up and dividing by 3 would not produce meaningful results.
However, if weights of relative importance were assigned to every individual item then apples could be compared to oranges, mathematically. Of course, statistical calculation doesn’t equal sound logic. In addition to using highly subjective guess work to arrive at these relative weights, other tactics such as adjusting for seasonality or simply excluding certain items if they’re “too volatile” are employed to massage the CPI.
Consider the two images below, the first being the latest snapshot of the CPI data showing the relative importance:
Now compare the relative importance from almost a year ago:
According to the charts, since last year, food has become less important while energy has become more important. Unfortunately, we live in a society that values statistical calculation and the ability to draw upon data more than reasoning.
Rather than argue with merits or lack of logic itself, mainstream economists found that the best career move is to not fight for the truth, but embrace the data, flaws included. This leads to Fedspeak like this excerpt from Andrew Hunter, a senior economists at Capital Economics who told CNBC:
The huge amount of inflation we had from rising gas prices has now almost completely reversed.
It’s one thing to say (price) inflation has slowed in recent months, but to claim “almost completely reversed,” simply makes no sense. The average person could only wish that prices have reversed, meaning price decreases, but this is not the case. At best, we can hope for a slowdown in the rate of increase.
He’s not alone in his inflation elation. In the same article, Mark Zandi, chief economist at Moody’s Analytics said:
I don’t think people will be talking about inflation this time next year.
And despite the skyrocketing price of eggs as purported by the abundance of memes on social media, he went so far as to say:
I think it’s already starting to feel better for people.
Naturally, Moody’s top economist is in a much higher income bracket than the average person; so his perspective could be skewed.
Ultimately, the biggest red flag is waved, not by the data itself, or the economists whose job it is to cheerlead the Fed and its support system, but it comes from this:
Inflation closed out 2022 with a 6.5% annual reading, as measured by the consumer price index, the U.S. Bureau of Labor Statistics said Thursday. It was in line with economists’ expectations.
Given the countless data fields and inputs, including relative weights of importance required to arrive at the CPI figure, how is it conceivable that economists’ expectations matched that of the bureau of labor and statistics?
Either these economists are really that good, or this data is really that bad.
It took 15 votes and a host of concessions to the Freedom Caucus and its allies, but Kevin McCarthy (finally) became Speaker of the House. Of course, the real length of the delay (in McCarthy’s eyes anyway) was much longer than the three days last week. Afterall, when John Boehner abruptly stepped down in 2015, McCarthy had been the heir apparent. A similar lack of support among the more hardline fiscally conservative members, however, resulted in the elevation of Paul Ryan to the top job in the House.
With Steve Scalise and Jim Jordan lurking in the prospective background, McCarthy initially talked tough: in a speech before the first vote he demanded the members loyalty, saying he’d “earned” the job.
A few embarrassing votes later, and the necessary concessions came on like a flood.
Frankly, there is a lot to like:
Apart from the fact any member may now precipitate a vote to vacate the chair, in the new House all income tax increases will now require a three fifths vote; general spending cut amendments will be allowed; no unauthorized appropriations may be increased; and, perhaps biggest of all, any increases in mandatory spending must be offset immediately by equivalent cuts.
Or, as the Washington Post put it: “The Terrorists Have Already Won.”
Gross hyperbole aside, the now-familiar debt ceiling standoff later this summer looks set to be a big one. McCarthy has, rightly, never been trusted, and his concessions to secure the job of Speaker rendered him effectively impotent. Whatever he and his allies may think they have cooked up to get out of the debt ceiling fight, they are mistaken.
It will be a fight, or it will be his job, and if Kevin McCarthy has proven one thing over the course of his time in D.C., it is that he will do anything for power.
Already looking ahead, Republicans and Democrats are openly mulling the parliamentary technicalities that might be exploited to avoid a government shutdown or default. A discharge petition, for example, could theoretically advance the bill directly to a vote over the objections of the Speaker.
McCarthy would no doubt be grateful.
It had been before the Civil War that an election for Speaker took longer than it did for the 118th Congress. Should he face an attempted ouster (likely), McCarthy will make history again as the first to face a privileged motion to vacate the chair in a century.
Recognizing his predicament, some Democrats are already speaking openly of the next debt ceiling fight as an opportunity. With Biden already saying he “refuses to negotiate” and that the debt ceiling must be raised “without strings,'' Democrats seem to be banking on a repeat of the experiences of both Clinton and Obama, who benefited politically from their respective standoffs and shutdowns.
A long shot, but not unimaginable scenario given the narrow margins in the current House, is Hakeem Jeffries winding up Speaker before the year is out. There are still a number of Tuesday Group Republicans in the House, and in the event of a stalemate some of them in purple districts might be tempted to jump ship in order to save themselves.
Such political consequences are impossible to predict with any certainty, and so only time will tell. However, for their part those committed House Republicans should stick to their guns: government spending needs cutting and the debt needs reducing.
As a parting observation, the revolution continues to eat its children: Just as Gingrich came to be viewed as too willing to compromise by his own protégés, such as John Boehner, Boehner in turn was forced out by his own more hard-edged newer colleagues, like Jim Jordan – who, surprisingly, threw his critical support behind McCarthy in his final bid.
In an alternate universe, Jim Jordan headed the conservative opposition to McCarthy in his bid for Speaker, and the California Republican never got to move his things back into the Speaker’s office he had presumptively occupied.
As things stand, the Kevin McCarthy of this universe shouldn’t make himself too comfortable.
The average price of eggs increased by 49%, butter/margarine by 34% year-over-year, CNBC reported as of November. Yet, with his first speech of the year, Federal Reserve Chair Jerome Powell addressed the issue of the Fed’s independence. Yes, the conference was on Central Bank independence. But how many Americans have any concern, or the slightest care for this?
At a conference in Sweden, Powell made his case using an appeal to democracy:
With independence comes the responsibility to provide the transparency that enables effective oversight by Congress, which, in turn, supports the Fed's democratic legitimacy.
Strange that one of the country's most opaque (and possibly most unconstitutional) organizations speaks about both transparency and democratic legitimacy; but once the propagandists commit to Orwellian leaps of the absurd, they must never deviate from the narrative.
Normally, talk about Fed independence centers around being independent from Congress. It was Congress who was tasked by the constitution to handle monetary affairs of the country; it was also Congress who essentially outsourced the task to the Fed. However, Powell somewhat deviated from script when speaking about Fed independence in relation to the banking system.
In the area of bank regulation, too, the Fed has a degree of independence, as do the other federal bank regulators. Independence in this area helps ensure that the public can be confident that our supervisory decisions are not influenced by political considerations.
It’s an odd relationship. I frequently express how peculiar it is that the Fed is tasked with regulating the banking system while simultaneously paying an annual dividend to the very banks it regulates. In addition to the payout of very (normally) large profits, the Fed acts as the “lender of last resort,” creating money to buy bonds when it chooses, bails out wall street, pays interest on bank reserves held at the Fed, conducts repo/reverse repo operations, carrying out all sorts of tactics to keep the banking sector afloat.
No other industry is supported like the banking industry. The existence of the Fed allows banks to take on tremendous amounts of risk, knowing the Fed will protect the downside. In other words: privatize profits and socialize losses; one of the many reasons those who long for a free and fair society are against the Fed.
And so, in addition to lack of transparency, the Fed has an independence problem, whether from Congress or the banking sector. If there was something to agree with him yesterday, it would be that the Fed should not use its monetary powers to tackle climate change. Unfortunately, his stance on not being a “climate policymaker” is not without caveats. Powell tells us:
Decisions about policies to directly address climate change should be made by the elected branches of government and thus reflect the public's will as expressed through elections.
… if it wasn’t clear:
But without explicit congressional legislation, it would be inappropriate for us to use our monetary policy or supervisory tools to promote a greener economy or to achieve other climate-based goals.
Was he giving a wink to Congress?
The moment Congress gives the Fed explicit direction to fight climate change is the moment it becomes appropriate to use the Fed’s monetary firepower to fight the war on climate change. As the democratic process affords, this would be okay if the public, via the electoral process, expressed enough interest on the topic.
It all invokes an interesting conclusion which illustrates the myth of Fed independence. It’s Congress (backed by wealthy individuals) who allows the Fed to exist. The Fed can only serve as a tool to protect special interests (i.e. the same wealthy individuals); and the Fed would never end itself anymore than Congress would. It’s a messy affair! But the Fed, Congress and the current banking system are inextricably linked, and by their very nature go against the public’s interest.
Great economists have worked on the economy’s key initial and boundary conditions—those in politics and governments. Now, maximum leverage will come from improving on the current party system.
Economics Is the Study of Humans’ Actions to Add Value
Economists study human action that’s intended to add value. Economists make use of philosophy, theory, and observations. Everything flows from the axiom that humans act intentionally.
Economists consider complex, real-world action. Because good economics is anchored in sound theory, it provides understanding that’s empirically valid. This is what the proper study of real-world action should be expected to do, since after all the most-complete model of the real world is the real world itself.
Politics Sets the Key Initial and Boundary Conditions
Politics is human action related to governments. On the human action that adds value, which is the subject of economics, politics is what sets the key initial and boundary conditions.
Initial and boundary conditions critically influence the actions throughout systems across time.
Initial and boundary conditions influence model systems, but equally influence real systems. In both cases, initial and boundary conditions limit the extreme values that any parts of the system reach, and constrain the time that this takes.
In economic systems, initial and boundary conditions limit how much value can be added by human action.
Voter Education Isn’t a Prerequisite for Change
It may seem that before we will get less-economically-harmful actions from governments, we will need voters to achieve numeracy and economic literacy. Or that before we will get constitutional limited governments, we will need voters to understand how the Constitution is designed to work. But in both cases the key limit is not education but organization.
Generations of voters were taught to favor the policies of Prohibition and of Progressivism before these policies began to be adopted. This was helped along by government schools. Government actions produce results that are bad, so proponents need voters to be indoctrinated.
But voters need little education to support economically-sound low taxes and constitutional limited governments. In the American Colonies, under astoundingly-limited governments, voters experienced growth substantial enough to propel them from subsistence-level to having per-capita purchasing power that exceeded that of Great Britain’s people by 68%. These voters eagerly supported keeping total taxes as a fraction of GDP no higher than 1% to 2%, and these voters watchfully supported the Constitution’s government-limiting processes. Government-limiting actions produce results that are good, so proponents only need to utilize effective government-limiting processes.
Maximum Leverage Is Provided by a Good Major Party
Today, the missing government-limiting process is the design and operation of at least one major party that’s good.
So far, no parties have been good. All parties to date have used centralized, top-down control and unenumerated, unrestrained power to select and elect candidates. All parties to date have lacked processes to disqualify bad incumbents.
The processes that all parties to date have used have ended up selecting for candidates who won’t use the Constitution’s decentralized, bottom-up control and offsetting powers to limit government.
A good party, by design, and in operation, will use Constitution-derived decentralized, bottom-up control and offsetting powers to limit the party government. A good party will have processes to disqualify bad incumbents.
Given this design and operation, a good party will select for candidates who will in turn use the Constitution’s decentralized, bottom-up control and offsetting powers to limit governments.
Past Great Economists Have Taken on Politics
To appreciate the relationship between economics and politics, it’s not necessary to visualize the economy as being capable of being mathematically modeled, it’s only necessary to pay attention to the big picture. Economics includes bedrock content—money, banking, finance—that, in historical experience, has resulted from the combined action of government people and their business cronies.
Naturally, then, politics has been considered in detail by great economists. For example:
- Frederic Bastiat used down-to-earth stories to solidly explain the benefits of voluntary cooperation and the harms of overriding cooperation with political coercion using law.
- Ludwig Von Mises served at a key time as chief economic advisor to the Austrian government, where he slowed Austrian inflation.
- Murray Rothbard wrote engagingly about governments and money, tackled the governments’ Great Depression, and ultimately provided a deep understanding of the impact of parties on economics in A History of Money and Banking in the United States and The Progressive Era.
These men, and others in their intellectual tradition, would have a field day with today’s decentralized media, today’s Tea Party and more-libertarian elected minorities in politics, and today’s opportunities to spontaneously network, experiment, and innovate.
Present Economists Should Help Limit At Least One Major Party
Many who present as economists conform their understanding to the desires of politicians. They are deep in the game, changing the outcomes. If good economists stand on the sidelines, that inaction might be all that’s needed to allow evil to triumph.
Economics isn’t a spectator sport, economics is purpose-driven action. The key value-adding actions are those of customers and producers. The key value-subtracting actions are those of politicians and cronies. And politics is controlled by parties, the tails that wag the dog.
To limit governments, then, limit at least one major party. To limit a party, focus first and foremost on processes that limit the party government. Build at least one good party to last.
Voters keep trying to break up the activist-crony, business-crony Progressive monopoly over government that has been grabbed by the major parties. All voters need is the right decentralized, self-limited party organization.
Economists are well-prepared to understand this and to be integral to the action that’s needed. Liberty is calling!
Another month has passed, and the Federal Reserve has once again been able to shrink its balance sheet. It’s now 7 months since the official start of Quantitative Tightening (QT). As of last release, on Thursday, their balance sheet stood at $8.507 trillion.
The long-term chart reveals it’s much easier to expand the balance sheet than to shrink it, with stock market crashes and recessions typically following.
The prior month’s article left off on November 30, when the balance sheet was over $75 billion higher. From Nov 30 to Jan 4, the US Treasuries (UST) balance decreased by roughly $58 billion and the Mortgage-Backed Securities (MBS) balance decreased by roughly $17 billion. (The reports come out every Thursday, so the time period is irregular).
Until we reach the inevitable conclusion of this Fed “tightening,” we will undoubtedly witness milestones and data points which we don’t see too often. Ryan McMaken wrote an article on the money supply and its recent move into negative growth. He noted that it is “not in itself an especially meaningful metric;” however, it does speak to the times we’re living in considering the last time this happened was 28 years ago. Look for new milestones to be hit as we continue along the path to a formal recession. Metrics such as how low the yield curve goes, for example, is a good one to watch.
In addition to economic data we must follow the headlines, like this one from CNBC, just at year end, to serve as a sign of things to come:
Stocks slipped on Friday to end a brutal 2022 with a whimper, as Wall Street wrapped up its worst year since 2008 on a sour note.
Of course, the Fed’s Monumental Monetary Tightening tends to have that effect on equities. And while the Fed can always print more money and may never technically become bankrupt, not every institution is as lucky. CNBC reminds us:
Bed Bath & Beyond warned Thursday it’s running out of cash and is considering bankruptcy.
Anyone holding Bed Bath & Beyond’s $1.2 billion in unsecured notes should be worried. To assuage reader’s fears, I checked the Fed’s Secondary Market Corporate Credit Facility (SMCCF) to see which corporate bonds America’s central bank held due to the COVID-19 crisis. The “SMCCF Transaction-specific Disclosures (XLSX)” document reveals the bonds previously held by the Fed:
(Note: The list above is from the last disclosure XLSX file on October 13, 2021, but on the January 11, 2021 file, the Fed held bonds of 557 different companies; this excludes all bond ETF holdings!).
Luckily Bed Bath and Beyond didn’t make the list. But why the Fed held bonds of Pfizer, Target, or Toyota… or any other multinational organization is knowledge in which we’ll never be privy.
In 2023, expect to see news headlines pile up as more companies inexplicably find that the sure bets they placed when credit was cheap and easy are not so certain anymore, now that credit is more expensive and harder to come by.
As a reminder, the continual problem (and inevitable conclusion) did not start when the Fed decided to tighten in 2022; rather, the foundation for failure was laid in 2020 when they chose to expand the balance sheet (again). It began with the $5 trillion money creation scheme, when the Fed intervened, buying bonds of Target instead of our once beloved, and possibly now defunct Bed Bath & Beyond.
The Federal Reserve has been oddly quiet this holiday season. However, members of congress have not. Only a few days before the new year, on December 29, President Biden signed the $1.7 trillion government funding bill known as the Consolidated Appropriations Act, 2023.
So, what do you get for $1.7 trillion these days?
The answer is not much, if you’re an American, as explained in the 53-page Summary of Appropriations Provisions by Subcommittee provided by the House Committee on Appropriations. Reading through the document reveals more Alphabet Soup Agencies than one thought possible, a whole host of foreign aid packages, as well as billions marked for Ukraine.
Continuing with the long-standing tradition of using public resources to fund special interests:
…the package includes $27.9 billion as part of the fourth Ukraine supplemental…
It’s almost meant to be confusing as the summary of this Act cites other Acts, so it’s difficult to determine the total amount being sent to Ukraine. For example:
The Additional Ukraine Supplemental Appropriations Act, 2023, provides $45 billion in emergency funding to support the Ukrainian people, defend global democracy in the wake of Russia’s unprovoked attack on Ukraine, and for other purposes.
This is in addition to last year’s funding, which according to the Council on Foreign Relations:
In 2022, the Biden administration and the U.S. Congress have directed nearly $50 billion in assistance to Ukraine…
Determining just how much money has, and will, ultimately be sent to Ukraine might take some time to figure out, as the war has yet to be won.
With each turn of the page the Consolidated Appropriations Act, 2023 reveals startling insights into how the government plans to spend $1.7 trillion of public money. Consider the section where it lists “support for U.S. allies, partners, and programs,” such as:
Venezuela: Recommends $50 million for democracy programs, as well as funding to support Venezuelan migrants in third countries.
Which pales in comparison to:
Colombia: Recommends $487 million, including $37.5 million for rule of law and human rights activities and $40 million to enhance security in rural municipalities with high coca production or levels of illicit activities.
It seems the War on Drugs also has yet to be won.
Then there are the usual amounts to keep the State Apparatus running: $858 billion in defense, $158.3 billion for Supplemental Nutrition Assistance Program (SNAP, i.e., food stamps), $4.25 billion for the patent office, $3.5 billion for the FDA, $1.75 billion for the ATF, and don’t forget:
The bill includes $12.3 billion for the IRS.
Unfortunately there is little comfort to offer. But if there is any consolation, the US Congress website provides the phone number of state representatives and senators.
It would be nice to talk to them. Ask them about their thoughts on a multitude of issues, such as how they decided to fund which countries, programs, and how they arrived at the amounts. Then consider how much more difficult this would be if the Fed wasn’t ready to create US dollars, buy US debt, and intervene in the market at a moment's notice, amongst other things…
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.
I’m rereading Brave New World as we’re kind of living in it. I loved it at school more and preferred it over 1984 because the characters were better developed, and the plot development more skillful, although each had a profound effect on me that has lasted throughout my life, and I often remember key scenes from each of them.
It’s amazingly perceptive, and replete with subtle meanings that are not explicitly stated. The masses of society participate meaningless activities with outpourings of emotions. One of the characters sees it for what it is and seethes with resentment at people objectifying one another as well as their lack of ability – or willingness – to critically examine the meaningless mantras that they repeat which form the social norms of their society.
However, the fact that he can see through the emptiness of his culture does not make him immune to the excruciating pain of being an outsider with no one to connect with. And it doesn’t stop his natural attraction to women, nor the pain of rejection that comes with it. At one point, feeling inadequate, he wants to assets himself to a friend, and mentions that he has a date with Lenina, a desirable woman. But his friend is tall and important and responds with, “Oh, good for you,” because he’s got girls throwing themselves at him for group sex in the park by virtue of his social status.
Perhaps you see yourself reflected in Brave New World, if you are a critic of the Covid regime, or mainstream politics, or what passes for economics these days. Knowing you have right on your side but feeling the clawing of the outsider.
The novel does not only capture the shallowness of society (“degeneracy” as is commonly now referred online) but how cruel it is to those who see through it, having nowhere to turn. It demonstrates how the carrot of worldly success and verbal rewards for conformity is underwritten by the stick of social rejection - encompassing exclusion from dating - pitting man against himself in an internal battle between the love of the truth as he sees it and the desire to experience communion and be one with his tribe.
- 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:
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:
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.