Tag: economics

Mailvox: A Bad Case Against Free Trade

I was asked to consider Paul Craig Roberts’s case against free trade, which he describes as follows:

In 2004 NY Democrat Senator Chuck Schumer and I opened a New Year with a jointly authored column in the New York Times. We raised the offshoring issue. American manufacturing jobs and the tech jobs of American professionals were being sent to Asia. We posed the question that if jobs offshoring was free trade, as economists claimed, was free trade any longer in America’s interest? My position was that jobs offshoring is a contradiction of free trade–more later–and Schumer was still in his idealistic period when he was concerned about the displacement of American labor by foreign labor in the production of goods and services that Americans consumed.

Our article caused a firestorm. The Brookings Institution in Washington called a conference and asked us to come and defend our position. C-Span broadcast the conference live and rebroadcast it a number of times. Schumer and I carried the day.

Delighted with the publicity, Schumer suggested a follow-up article. The NY Times was eager. We began a draft, and then it went cold. My explanation is that Wall Street, which was committed to jobs offshoring, got to Schumer and explained campaign contributions to him.

I continued on. Conservatives, free market economists, and libertarians, who are indoctrinated with free trade, but who do not comprehend the theory, called me a heretic. Nevertheless, both the Wall Street Journal and the Washington Post were intrigued that the “most ardent” of the “Reagan policymakers” had taken a position against the policy that Wall Street was imposing on the country.

The Wall Street Journal assigned Timothy Aeppel to arrange a series of debates to be published in the Wall Street Journal between me and Columbia University Professor Jagdish Bhagwati. The question was: Is jobs offshoring really free trade?

Adam Smith and David Ricardo’s theory of free trade rests on the principle of comparative advantage. What this means is that a country’s capital remains employed at home and is employed in areas in which the capital is best used. If all countries do this, there are gains from trade, and all countries will be better off than if they are self-sufficient. I have wondered if the free trade theory was used as a stratagem to repeal the British Corn Laws and reduce the income and power of the landed aristocracy.

Both Smith and Ricardo made it completely clear that if a country’s capital left the country, it was pursuing absolute advantage, not comparative advantage, and free trade theory is vitiated. This is the point I made. Without comparative advantage, there is no case for free trade.

This is trivial and irrelevant Econ 103-level criticism of free trade. No one has ever denied it, and it permits the discussion to be transformed from “is free trade good for the nation” to “is the current situation one in which absolute advantage or comparative advantage applies”.

Political matters are intrinsically rhetorical, so building a circumstantial case on what most people will see as a minor technical point is never going to be very convincing. It’s no surprise that despite the fact that he and Schumer “carried the day”, they ended up completely losing the political battle.

The point is not that “free trade is sometimes bad”, the point is that free trade is bad even in the case of comparative advantage that supposedly provides for mutual benefit, but destroys both nations in the process.

And yes, the free trade theory was never more than an excuse to repeal the Corn Laws. Ricardo was an an investor and politician, not an economist, and the arguments he presented were dishonest, incomplete, and wrong, which is why Joseph Schumpeter labled the structure of Ricardo’s arguments “the Ricardian vice”.

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The Markets Sink

I stay very, very far away from the stock markets, since they are a rigged game. But they are useful indicators of social mood, and so it’s informative that Tokyo just saw the worst day on the Nikkei since the end of the Heisei Boom in 1988.

Japan’s benchmark Nikkei 225 stock index plunged 12.4% on Monday, resuming sell-offs that are shaking world markets as investors fret over the state of the U.S. economy. The Nikkei closed down 4,451.28 points at 31,458.42. The market’s broader TOPIX index fell 12.8% as selling picked up in the afternoon.

Darkening the outlook for trading on Wall Street, early Monday the future for the S&P 500 was 2.4% lower and that for the Dow Jones Industrial Average was down 2.6%.

The Nikkei 225 dropped 5.8% on Friday, making this its worst two-day decline ever. Its worst single-day rout was a plunge of 3,836 points, or 14.9%, on Oct. 20, 1987, a day that was dubbed “Black Monday.” This Monday was gloomy enough: at one point, the benchmark sank as much as 13.4%.

In any event, it’s clear that the central banks have kicked the can, locked things down, and pulled every rabbit out of their hat that they can imagine. This leaves war as the only available panacea, so I suppose it’s useful in this regard that WWIII already began two years ago; it would be an interesting historical echo if the USA gets directly involved again precisely two years after the global conflict began.

1914-1917, 1939-1941, 2022-2024?

The other thing that strikes me is that by sending four carriers to the Middle East, we may – MAY – be witnessing the anticipated Sicilian Expedition Moment in the making. Nothing would more profoundly exemplify the end of Pax Americana and the imperial USA than the simultaneous sinking of all four carriers.

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Antagonizing China

Since sanctions and seizures have worked so well against Russia, Clown World’s brilliant strategists are planning to utilize the same effective economic weapons against China.

NATO officials are discussing taking action to reclaim some Chinese-owned infrastructure projects in Europe should a wider conflict with Russia break out in the east of the continent, three officials involved in the discussions told CNN.

A decade ago, when Europe was still crawling out of the economic crater caused by the global financial crisis, the promise of infrastructure funding from Chinese-owned investment firms seemed like a major windfall.

Now, with the largest land war being waged in Europe since World War II – and the West warning of Beijing’s support of Russia’s invasion of Ukraine – NATO countries now see those investments as a liability, with allies beginning to discuss ways to reclaim some of those projects, the officials said. The fear, according to one US official, is that Beijing could use the infrastructure it owns in Europe to provide material assistance to Russia if the conflict were to expand. The goal, officials said, is to figure out a path forward well in advance of any potential conflict…

From rail lines connecting Eastern Europe to China, to ports located in the North Sea and the Baltic Sea, China has funded tens of billions of dollars in infrastructure investments under its Belt & Road Initiative, which European nations began signing onto in 2013.

So, this should end well… It goes without saying that this is an economic catastrophe, and probably a military catastrophe as well, in the making. The sooner Americans and Europeans throw off their disastrous, destructive, and wicked ruling elites, the better chance they will have of seeing their nations survive to the 22nd Century.

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Mailvox: Debt Deflation in Action

A reader notices that the credit card companies are rapidly reducing the amount of credit available to their more conservative cardholders.

My husband and I run a small business and have noticed an unusual practice by credit card companies over the last 4-5 months.

Our business is seasonal, and during our ramp up in from February to April, we usually max out 6 cards on supplies and improvements for the coming season. And then the profits from May and June pay those down, before we start making real profits July-October. We’ve been doing this for over ten years, and typically the result of the max-out and quick pay down has been an increased credit limit. 

This year, as we have started the pay down, each large pay down amount, say $2000 on a $10,000 card for example, has come with a credit limit reduction of 50% – 100% of the amount paid. One card, upon paying it off in whole dropped from $2500 to $350 as the limit. 

We have no personal reasons that our limits in particular would be getting slashed after so many years of increases. So I am wondering if this is a systemic attempt to use debt deflation to slow the rate of inflation without further interest rate increases. 

More generally, if what I’m seeing is systemic, is this a correct understanding of debt deflation? 

This is 100 percent debt deflation. And in some ways, it’s more worrisome than the leadup to the 2008 contraction. Whereas in 2008, there was a dearth of people willing to borrow, now it is apparent that the banks simply can’t afford to offer the credit if there isn’t a sufficient amount of interest to be gained.

Which suggests that the 2024 credit cruch and subsequent financial institution failures will be bigger and more consequential than we witnessed in 2008. It’s even possible that the federal government will not be able to bail out most of the failing institutions.

UPDATE: An SG reader adds another indicator worth noting.

We had a different scenario but still deflationary. Our credit card had a 55-day interest free period which we have never paid interest on in 30+ years. Two months ago, we noticed in the fine print at the back page that it was reducing from 55 days to 44 days. It was hidden away and was only announces on the two previous bills. It had been 55 days for 30+ years.

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The Fourth Front

It appears the fourth front of WWIII will not be Africa, but the Korean Peninsula:

South Korea said Thursday that it would consider sending arms to Ukraine, a major policy change that was suggested after Russia and North Korea rattled the region and beyond by signing a pact to come to each other’s defense in the event of war.

The comments from a senior presidential official came hours after North Korea’s state media released the details of the agreement, which observers said could mark the strongest connection between Moscow and Pyongyang since the end of the Cold War. It comes at a time when Russia faces growing isolation over the war in Ukraine and both countries face escalating standoffs with the West.

According to the text of the deal published by North Korea’s official Korean Central News Agency, or KCNA, if either country gets invaded and is pushed into a state of war, the other must deploy “all means at its disposal without delay” to provide “military and other assistance.”

I had my suspicions about things heating up on the Korean Peninsula once it became obvious that the USA was going to try to substitute South Korean and Japanese ship-building for its own lack of ship-building capacity. The amount of Clown World interest and investment in both countries has noticeably appreciated (see the previous post on investments into the comics industry) and therefore a counter-move by the BRICSIA alliance was inevitable.

I was a little surprised that it was Russia that made the overtures to the North Koreans and not the Chinese, except that it’s now clear that Russia is playing bad cop while China whistles innocently and pretends to not be directly involved. What will truly shake things up, however, is if an invitation to join BRICSIA is offered to North Korea, as that would truly be a formidable gauntlet to cast before the G7.

It shouldn’t be too long before Clown World realizes that it is no position to sanction anyone, and to the contrary, the rest of the world is effectively sanctioning it.

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The USA Already Lost WWIII

As I’ve been banging repeatedly on since 2004, warfare since 1940 has primarily concerned industrial capacity. Of course, the Clown World establishment doesn’t listen to me, so they’re genuinely confused and afraid now that it’s clear that both China and North Korea are formally allied with Russia, giving the sovereign nations a 100x advantage over the post-industrial financialized economies of Clown World.

Remember when the narrative was that it was Russia totally reliant on Western-supplied parts in its weaponry? Here an American general literally admits the entire U.S. military structure would collapse in a day if China issued an embargo against them:

‘If we were in a war with China and it stopped providing parts, we wouldn’t be able to build the planes and weapons we needed,’ he said.

A startling report released earlier this year revealed Chinese firms have a stranglehold across 12 critical technologies that are vital to US national security, including nuclear modernization, hypersonic and space technologies.

The study, which was carried out by defense software firm Govini, delivered a damning indictment on the American armaments industry.

‘U.S. domestic production capacity is a shriveled shadow of its former self,’ the report said. ‘Crucial categories of industry for U.S. national defense are no longer built in any of the 50 states.’

Remember when it was Russia using Western chips in all of its missiles?

Perhaps most worryingly, Govini found that more than 40 per cent of the semiconductors that sustain Department of Defense (DoD) weapons systems are now sourced from China.

How the tides have turned.

It seems the West is slowly coming to its awakening moment: it stands no chance in a long term conflict against the manufacturing powerhouse of the Russia-China-North Korea-Iran bloc.

The central problem is that the strategic geniuses of Clown World are neocons like the Kagan clan, who understand nothing of military history. Their expertise is in subjective rhetoric and subversion, not objective logic and reality. They’re like the bad guys in a Hollywood horror flick, where all that is necessary to defeat them is to refuse to believe in them and proceed as if they don’t even exist.

The astonishing thing is that the corpocracy is still exporting manufacturing capacity abroad. Just yesterday, John Deere announced that it was moving its factories to Mexico. So US manufacturing capacity is actually shrinking, just as European energy production is shrinking, while Russia, China, and North Korea are all ramping up their production of everything from ammunition to tanks.

Clown World should surrender now. But they won’t, because they don’t deal in objective reality. They never have.

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Diversity and Finance

Are why nothing works anymore. From /pol/:

Finance bros are ruining society. Boeing is just the start. Everything you rely on to “Just Work” in your day to day life, in a few years, will no longer be trustworthy. Regular people are soon going to need to inspect every bridge they walk on. Companies don’t give a piss about ensuring safety anymore.

Companies are now being ran by fratdouche finance bros who all feel they deserve prestigious Wall Street positions because they got a C in College Algebra. All these colleges are pushing out thousands of these retards who basically spent four years learning arts/crafts + Excel, and they all think they deserve a job. The worst are the Patagonia douches from big schools like UPenn who are just as stupid and uneducated as the rest, but still think they’re smarter than everyone else because of their school where they learned no math/science/art/history.

The corporate world loves these retards even though they’re inept across the board, and they get put in positions of power. Shareholders demand infinite growth from companies that have clearly peaked, and the finance bros deliver by cutting overhead, starting with safety, engineering, testing, & maintenance.

Corporate sees people like me as annoying chuddjaks trying to ruin their fun, and whenever shit goes belly up, these fucks just collect their bonus, update their resume, and move to the next company.

The worst part is maintenance isn’t a blue collar field of retards anymore. Aircraft maintenance especially is full of skilled, highly-trained technicians who will bounce at the first sign of corporate mistreatment. Finance fags think these guys are toothless retards who will work for anything, when they’re actually sending daily, 6-figure job offer emails straight to their spam folders. I work in energy production, and it’s no different here. I can’t hold onto talent with the way corporate shits on these men like they’re lucky to even have a job.

This is the inevitable end game of reducing everything to mere numbers. And it’s only going to keep getting worse from here, so the more you develop a community that can provide everyone with what it needs, the better off you’re going to be.

Milton Friedman and Leonard Read can stick their proverbial pencils up their deceased posteriors. Free trade, like free speech, was always a satanic trap. As I wrote years ago, we’ll be lucky if we still have indoor plumbing when things hit their nadir.

Collect old books. Preserve their knowledge. You’re going to need it, because imposing social justice limits on AI is going to break Wikipedia soon.

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The Harsh Lessons of History

One of the great benefits of reading history is that it provides the reader with an informed perspective to interpret current events. As I was scheduling future posts for the daily Castalia Library serialization of the 1911 edition of The Cambridge Medieval History, I came across this very timely section on the economic challenge faced by the Roman emperors in the early Third Century.

Serious economic difficulties have moral causes, and there was no radical cure short of a complete change in the temper of society. Yet much might have been done by a permanent reduction of taxation and a reform of its incidence and of the methods of collection. Instead of this, the machinery of government (and its expense) was greatly increased. The army had to be held in check by courts of Oriental splendour and a vast establishment of corrupt officials. We can see the growth of officialism even in the language, if we compare the Latin words in Athanasius with those in the New Testament. So heavier taxes had to be levied from a smaller and poorer population. Taxation under the Empire had never been light ; in the third century it grew heavy, under Diocletian it was crushing, and in the later years of Constantine the burden was further increased by the enormous expenditure which built up the new capital like the city in a fairy tale. We are within sight of the time when the whole policy of the government was dictated by dire financial need. We have already reached a state of things like that we see in Russia.

That passage anticipated the October Revolution by six years. Given that there are absolutely no indications that the American people are in any moral condition to force “a complete change in the temper of society” or even to stop the massive invasion of the last 59 years, it’s possible that we will see the political collapse I predicted would take place in 2033 as soon as 2030.

Simplicius notes that the Clown World elite that rules the USA appears to finally be aware that their predatory, self-serving governance has weakened the empire to the point they are in danger of being swept away completely.

I’ve written previously on the panic currently effervescing through the global elites, made viscerally apparent at conclaves like the Davos forum earlier this year. But in America particularly, a deep worry is now consciously gnawing the ruling class—they can see it, feel it: that the American Empire is on its last legs, close to collapse.

This month has seen a bevy of new thinkpieces from top American deepstate figures or old-guard publications urging the changing of course, lest the country be swept away by the remorseless tide of history… This is the theme which recurs again and again throughout the new zeitgeist taking over political discourse in the stricken Beltway—panicking neocons are exhorting each other: we’re in a fight for our lives, if we don’t accept the new realities, we’ll drown!

Ruling Class Finally Awakens to the Reality of America’s Decline, 22 June 2024

The clowns won’t be able to do anything to reverse the decline, or even slow it, of course. Subversion, rhetoric, corruption, and doubling-down are all they know how to do, but none of those tactics work when you’re the one in charge and you’re responsible for maintaining the social order. The more they subvert, the more they corrupt, and the more they double down, the weaker their position becomes.

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The End of the Petrodollar

In January 2023, Alex Macris wrote a book entitled RUNNING ON EMPTY: How the Imminent Collapse of the Petrodollar System sets the Stage for World War III.

America’s global hegemony is based on the petrodollar system and the Russo-Ukraine war is rapidly bringing that system to an end. The end of the petrodollar will be the end of the world order as we have known it since 1945. Though the U.S. petrodollar system is perhaps the most important economic structure in the world, it is almost never discussed in mainstream sources.

In RUNNING ON EMPTY, author Alexander Macris traces the circumstances by which the petrodollar system came into being; the disastrous effect that the system had on US domestic and foreign affairs, ranging from deindustrialization to foreign wars to widening gaps between the 1% and the rest of us. With that background in place, the book explains the geostrategy of the major powers on Earth today, how those strategies lead inexorably to the Russo-Ukraine War, and how that war will usher in the end of the petrodollar system.

Yesterday, it was reported that Saudi Arabia is not renewing the 50-year petrodollar agreement with the US that expires on June 9, 2024.

What this means is that BRICSIA is increasing the economic pressure on the United States, by further reducing its ability to find buyers for its debt and thereby shift the effects of its debt-generated inflation to the rest of the world. Business Insider describes what it anticipates will result:

A movement away from the dollar—even in slow motion—will mean a rising cost of living for Americans. With fewer foreigners holding on to dollars, the US regime’s current runaway monetary inflation will create more domestic price inflation. In other words, movement away from the dollar will mean the US regime must engage in less monetization of the nation’s debt if it wishes to avoid runaway inflation. It also likely will lead to a need to pay higher interest rates on US government bonds, and that will mean a need for more taxpayer money to service the debt. It will mean that it will become more difficult for the US regime to finance every new war, program, and pet project that Washington can think up.

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Magical Thinking and the Impotence of Mammon

The self-appointed gods of Clown World are having trouble understanding the difference between power and influence, and that no amount of influence – which is what money always and ultimately amounts to – is an effective substitute for actual material power:

We come back to the question of why anybody believed $60 billion could move the needle for Kiev’s cause in the first place. But this question is, alas, difficult to answer because policymaking in Washington is enshrouded under a thick fog that consists of two dominant components: magical thinking and political imperatives. For those who earnestly believed that $60 billion would turn the tide of the war, it is more of the former; for those aligning themselves with the political winds and pretending to support Ukraine much as a mime pretends to be trapped in a phone booth, it is the latter. In many cases it is both, and it is difficult to tell where one begins and the other ends.

Magical thinking is a recognizable symptom of that particular moment in time when an erstwhile great power is in decline but events have not quite yet forced it to come to grips with that decline. It is also a time of diminished scope for action. In times past, perhaps Washington would have solved a crisis such as Ukraine through crafty diplomacy or orchestrated a formidable proxy war with its industrial might and military expertise. But the US now seems incapable of sophisticated diplomacy and its industrial base has badly atrophied through decades of offshoring and financialization. After mostly fighting insurgencies in recent times, it now has no idea how to fight a peer war. About all that it can muster is aid bills with large dollar figures. If all you have is a hammer, the old saying goes, every problem looks like a nail. If all you have left is a printing press for dollars, then every problem must be solvable by an infusion of money – even if it’s not entirely clear what that money can buy.

But here we have stumbled onto something interesting: a belief in the omnipotence of money. Perhaps not a sincere belief; are there any sincere beliefs in Washington? Let’s think of it more as an ingrained pattern of thought for confronting a wide range of problems. In that sense, it is a framework suspiciously reminiscent of the approach used to combat financial crises. It doesn’t seem like so much of a stretch to imagine the entire Ukraine aid discussion framed as something that has become very familiar in recent years: a financial bailout.

A too-big-to-fail financial institution called Ukraine is teetering on the edge of failure and a bailout is needed. Although the bank is far away from the heart of Wall Street, there are fears of contagion – if this one fails, others will follow and soon no bank anywhere will be safe. The bank’s owners may be crooks, but that is not what is preoccupying policymakers. They are nervous about a spread that has suddenly moved against the bank: it is supposed to trade at 1:1 but has blown out to 1:10 (the ratio of artillery fire by Ukrainian and Russian forces). Shoving a $60-billion bailout into the bank should at least put out the fires and calm markets.

Zoltan Poszar, the legendary former Credit Suisse chief strategist who needs no introduction in finance circles, made a fascinating observation on the topic of the reflexive response of throwing money at a problem. Poszar was speaking narrowly about how a certain group of people approach a certain problem and was not talking about policymaking, much less Ukraine, but his conclusion traces the contours of something deeper.

When the specter of inflation reemerged in 2021, Poszar made the rounds of portfolio managers and, after talking with them, reached an interesting conclusion: nobody knew how to think about inflation. Nearly everyone on Wall Street is too young to remember the last serious bout of inflation, which occurred way back in the 1980s. So, according to Poszar, they all thought of the spike in the inflation charts as just another spread that blew out on their Bloomberg screens that could be solved by throwing balance sheet at it – a “crisis of basis” as he calls it. The formative experiences for today’s denizens of Wall Street, Poszar explains, are the Asian financial crisis of 1998, the Great Financial Crisis of 2008, some spread blowouts since 2015, and the pandemic. In all of these cases, money was pumped in and eventually the dislocations disappeared.

To put this in plain English, Poszar’s clients hadn’t encountered a problem that couldn’t be solved – or at least swept under the rug – by simply adding money, in whatever form, whether via an emergency loan or quantitative easing. This is of course a bit of an oversimplification, but it captures something of the essence of the prevailing pattern of thought.

The seeds of failure are sown by the blooming flowers of success. The current generation of clowns have literally never encountered a problem that could not be solved by throwing money at it. All of their theoretical and practical knowledge points to the same solution: more money.

This is why the rise of the BRICSIA alternative to the USD, the CRIPS alternative to SWIFT, and the Belt and Road alternative to the IMF loansharks are potential death blows to Clown World. They have, in three fell swoops, essentially disarmed Clown World by taking its only weapon out of the equation.

I strongly suspect the fine hand of Wang Hunin in this long-term strategic approach.

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