Tag: war

War and the Austrian Business Cycle

David Stockman explains the oft-observed connection between economic contraction and military conflict. Astute observers will note that the cycle he describes correlates much better with my “Limits of Demand” modification of the core mechanism of the Austrian Business Cycle:

During World War I the US public debt rose from $1.5 billion to $27 billion—an eruption that would have been virtually impossible without wartime amendments which allowed the Fed to own or finance U.S. Treasury debt.  These “emergency” amendments—it’s always an emergency in wartime—enabled a fiscal scheme that was ingenious, but turned the Fed’s modus operandi upside down and paved the way for today’s monetary central planning.

As is well known, the Wilson war crusaders conducted massive nationwide campaigns to sell Liberty Bonds to the patriotic masses. What is far less understood is that Uncle Sam’s bond drives were the original case of no savings? No credit? No problem!

What happened was that every national bank in America conducted a land office business advancing loans for virtually 100 percent of the war bond purchase price—with such loans collateralized by Uncle Sam’s guarantee. Accordingly, any patriotic American with enough pulse to sign the loan papers could buy some Liberty Bonds.

And where did the commercial banks obtain the billions they loaned out to patriotic citizens to buy Liberty Bonds?  Why the Federal Reserve banks opened their discount loan windows to the now eligible collateral of war bonds.

Additionally, Washington pegged the rates on these loans below the rates on its treasury bonds, thereby providing a no-brainer arbitrage profit to bankers.

Through this backdoor maneuver, the war debt was thus massively monetized.  Washington learned that it could unplug the free market interest rate in favor of state administered prices for money, and that credit could be massively expanded without the inconvenience of higher savings out of deferred consumption.  Effectively, Washington financed Woodrow Wilson’s crusade with its newly discovered printing press—-turning the innocent “banker’s bank” legislated in 1913 into a dangerously potent new arm of the state.

It was this wartime transformation of the Fed into an activist central bank that postponed the normal post-war liquidation—-moving the world’s scheduled depression down the road to the 1930s. The Fed’s role in this startling feat is in plain sight in the history books, but its significance has been obfuscated by Keynesian and monetarist doctrinal blinders—that is, the presumption that the state must continuously manage the business cycle and macro-economy.

Having learned during the war that it could arbitrarily peg the price of money, the Fed next discovered it could manage the growth of bank reserves and thereby the expansion of credit and the activity rate of the wider macro-economy. This was accomplished through the conduct of “open market operations” under its new authority to buy and sell government bonds and bills—something which sounds innocuous by today’s lights but was actually the fatal inflection point. It transferred the process of credit creation from the free market to an agency of the state.

As it happened, the patriotic war bond buyers across the land did steadily pay-down their Liberty loans, and, in turn, the banking system liquidated its discount window borrowings—-with a $2.7 billion balance in 1920 plunging 80 percent by 1927. In classic fashion, this should have caused the banking system to shrink drastically as war debts were liquidated and war-time inflation and malinvestments were wrung out of the economy.

But big-time mission creep had already set in.  The legendary Benjamin Strong had now taken control of the system and on repeated occasions orchestrated giant open market bond buying campaigns to offset the natural liquidation of war time credit.

Accordingly, treasury bonds and bills owned by the Fed approximately doubled during the same 7-year period. Strong justified his Bernanke-like bond buying campaigns of 1924 and 1927 as helpful actions to off-set “deflation” in the domestic economy and to facilitate the return of England and Europe to convertibility under the gold standard.

But in truth the actions of Bubbles Ben 1.0 were every bit as destructive as those of Bubbles Ben 2.0.

In the first place, deflation was a good thing that was supposed to happen after a great war. Invariably, the rampant expansion of war time debt and paper money caused massive speculations and malinvestments that needed to be liquidated.

Likewise, the barrier to normalization globally was that England was unwilling to fully liquidate its vast wartime inflation of wage, prices and debts. Instead,  it had come-up with a painless way to achieve “resumption” at the age-old parity of $4.86 per pound; namely, the so-called gold exchange standard that it peddled assiduously through the League of Nations.

The short of it was that the British convinced France, Holland, Sweden and most of Europe to keep their excess holdings of sterling exchange on deposit in the London money markets, rather than convert it to gold as under the classic, pre-war gold standard.

This amounted to a large-scale loan to the faltering British economy, but when Chancellor of the Exchequer Winston Churchill did resume convertibility in April 1925 a huge problem soon emerged.  Churchill’s splendid war had so debilitated the British economy that markets did not believe its government had the resolve and financial discipline to maintain the old $4.86 parity. This, in turn, resulted in a considerable outflow of gold from the London exchange markets, putting powerful contractionary pressures on the British banking system and economy.

Real Cause of the Great Depression: Collapse of the Artificial Boom

In this setting, Bubbles Ben 1.0 stormed in with a rescue plan that will sound familiar to contemporary ears. By means of his bond buying campaigns he sought to drive-down interest rates in New York relative to London, thereby encouraging British creditors to keep their money in higher yielding sterling rather than converting their claims to gold or dollars.

The British economy was thus given an option to keep rolling-over its debts and to continue living beyond its means. For a few years these proto-Keynesian “Lords of Finance” —- principally Ben Strong of the Fed and Montague Norman of the BOE—-managed to kick the can down the road.

But after the Credit Anstalt crisis in spring 1931, when creditors of shaky banks in central Europe demanded gold, England’s precarious mountain of sterling debts came into the cross-hairs.  In short order, the money printing scheme of Bubbles Ben 1.0 designed to keep the Brits in cheap interest rates and big debts came violently unwound.

In late September a weak British government defaulted on its gold exchange standard duty to convert sterling to gold, causing the French, Dutch and other central banks to absorb massive overnight losses. The global depression then to took another lurch downward.

But central bankers tamper with free market interest rates only at their peril—-so the domestic malinvestments and deformations which flowed from the monetary machinations of Bubbles Ben 1.0 were also monumental.

Owing to the splendid tax-cuts and budgetary surpluses of Secretary Andrew Mellon, the American economy was flush with cash, and due to the gold inflows from Europe the US banking system was extraordinarily liquid. The last thing that was needed in Roaring Twenties America was the cheap interest rates—-at 3 percent and under—that resulted from Strong’s meddling in the money markets.

At length, Strong’s ultra-low interest rates did cause credit growth to explode, but it did not end-up funding new steel mills or auto assembly plants.  Instead, the Fed’s cheap debt flooded into the Wall Street call money market where it fueled that greatest margin debt driven stock market bubble the world had ever seen. By 1929, margin debt on Wall Street had soared to 12 percent of GDP or the equivalent of $2 trillion in today’s economy.

As is well known, much economic carnage resulted from the Great Crash of 1929. But what is less well understood is that the great stock market bubble also spawned a parallel boom in foreign bonds—-specie of Wall Street paper that soon proved to be the sub-prime of its day.

Indeed, Bubbles Ben 1.0 triggered a veritable cascade of speculative borrowing that soon spread to the far corners of the globe, including places like municipality of Rio de Janeiro, the Kingdom of Denmark and the free city of Danzig, among countless others.

This is an excellent addition to both military and financial history. Be sure to read the whole thing; it’s close 10k words, but it is definitely worth the time and effort. This, in particular, is a key observation that underlines the falsity of the Keynesian narrative: “The Keynesians have never acknowledged the single most salient statistic about the war debt: namely, that the debt burden actually fell during the war, with the ratio of total credit market debt to GDP declining from 210 percent in 1938 to 190 percent at the 1945 peak!”

I’d noticed this myself in looking at total credit market debt, but never thought through the implications as Stockman has. One can even see it in the relevant chart posted in RGD.

US drone intercepted

It appears as if both sides of the Ukraine tinderbox are now assuming a war footing:

A United States surveillance
drone has been intercepted above the Ukranian region of Crimea, a
Russian state arms and technology group said Friday.

“The
drone was flying at about 4,000 metres (12,000 feet) and was virtually
invisible from the ground. It was possible to break the link with US
operators with complex radio-electronic” technology, said Rostec in a
statement. The drone fell
“almost intact into the hands of self-defence forces” added Rostec,
which said it had manufactured the equipment used to down the aircraft,
but did not specify who was operating it.

“Judging
by its identification number, UAV MQ-5B belonged to the 66th American
Reconnaissance Brigade, based in Bavaria,” Rostec said on its website,
which also carried a picture of what it said was the captured drone.

The Obama administration is flirting with an incredibly stupid war. Talk about cashing in one’s military credibility unwisely! Not only does the USA have zero support from the American people for a war against Russia over Ukraine, it’s entirely possible that more than half the American population believes Russia to be in the right.

The man who should have been president

Ron Paul points out that Vladimir Putin is in the legal right and it is the USA and EU who have violated the relevant agreements:

The West will claim “everything Putin does is illegal,” but while Ron Paul notes “he’s no angel,” the former congressman adds Putin “has some law on his side.” America has a right of secession and Crimea should have it too – “it’s such a facade,” Paul explains, noting that “contracts, and agreements, and treaties” linked to the Sevastopol base provide Putin with a legal basis to militarily occupy Crimea, “Russia could accuse America of occupying Cuba because it, too, holds a lease on the land around the Guantanamo Bay prison.”

Paul goes on to note the hypocrisy of the West and alleges US and European participation in the overthrow of Yanukovich….

This is a showdown that USSA and the EUSSR intentionally sought. They are the aggressors, not Russia, and no amount of ex post facto cheerleading from the mainstream media can conceal that.

And it is particularly rich to hear the Eurofascists complaining about the Crimean referendum on Sunday. The unelected EU Commission has not only denied most of the people of Europe referendums on independence, but forced the people of Ireland to repeatedly vote until they produced the result that the Eurofascists wanted. Since they actively oppose the right of the people of the UK to self-determination, it should be no wonder that they also oppose it for the people of the Crimea.

If the USA was genuinely interested in human liberty, democracy, and self-determination, it would be placing economic sanctions on Brussels, not Moscow.

Disarmament is always dumb

I’m only surprised that it took the Ukrainians almost a quarter of a century to regret their unilateral disarmament. Did they learn nothing from the fate of Czechoslovakia 52 years before?

Ukraine may have to arm itself with nuclear weapons if the United States and other world powers refuse to enforce a security pact that obligates them to reverse the Moscow-backed takeover of Crimea, a member of the Ukraine parliament told USA TODAY.

The United States, Great Britain and Russia agreed in a pact “to assure Ukraine’s territorial integrity” in return for Ukraine giving up a nuclear arsenal it inherited from the Soviet Union after declaring independence in 1991, said Pavlo Rizanenko, a member of the Ukrainian parliament.

“We gave up nuclear weapons because of this agreement,” said Rizanenko, a member of the Udar Party headed by Vitali Klitschko, a candidate for president. “Now there’s a strong sentiment in Ukraine that we made a big mistake.”

Perhaps the biggest cost of America’s strategically foolish intervention in Ukraine is the way it will put an end to any attempt to get Iran, North Korea, or any other country that doesn’t want to be invaded, occupied, or partitioned to give up their nuclear ambitions. The lesson being taught is this: never give up your nukes.

Si vis pacem, para bellum. If you want peace, prepare for war.

The international hypocrite

No one can reasonably take the US position on Crimean self-determination seriously anymore. Even the New York Times appears to be uncomfortable with the Obama administration’s anti-democratic actions:

They wanted to break away from a country they considered hostile. The central government cried foul, calling it a violation of international law. But with the help of a powerful foreign military, they succeeded in severing ties.

The Kosovars’ secession from Serbia in 1999 drove a deep wedge between the United States and Russia that soured relations for years. Washington supported Kosovo’s bid for independence, culminating in 2008, while Moscow saw it as an infringement of Serbia’s sovereignty.

Now 15 years later, the former Cold War rivals again find themselves at odds, but this time they have effectively switched sides: Russia loudly proclaims Crimea’s right to break off from Ukraine while the United States calls it illegitimate. The showdown in Ukraine has revived a centuries-old debate over the right of self-determination versus the territorial integrity of nation-states.

The clash in Crimea is hardly an exact parallel of the Kosovo episode, especially with Russian troops occupying the peninsula as it calls a March 16 referendum to dissolve ties with Ukraine and rejoin Russia. Though the United States intervened militarily in Kosovo, it did not do so to take the territory for itself. But the current case underscores once again that for all of the articulation of grand principles, the acceptability of regions breaking away often depends on the circumstances.

Consider the different American views of recent bids for independence.
Chechnya? No.
East Timor? Yes.
Abkhazia? No.
South Sudan? Yes.
Palestine? It’s complicated.

It is an acutely delicate subject in the West, where Britain wants to keep Scotland and Spain wants to keep Catalonia.

And the USA murdered hundreds of thousands in order to forcibly “keep the Union together” and deny the sovereign Southern States their right to self-determination. This has not escaped the attention of the world’s second-rate powers, some of whom have indicated support for the Russian position:

Indian officials have told Telegraph India that, in the
newspaper’s words, Delhi is “convinced that the West’s tacit support for
a series of attempted coups against democratically elected governments —
in Egypt, Thailand and now Ukraine — has only weakened democratic roots
in these countries.”

This is the cost of sacrificing principles for pragmatism. You don’t get to claim the moral high ground anymore and no one is going to view you as the good guy. Russia is acting perfectly within its rights: it has permission to station as many as 25,000 troops in the Crimea. Not only that, but its actions are far more in accord with legitimate democratic rule than those of the anti-democratic USA and EU, who are complicit in overthrowing Ukraine’s democratically elected government as well as installing an unelected prime minister in Italy.

This comment from Zerohedge may explain the real reason for the drama in the Ukraine:

According to the staff of the “Borispol” airport in Ukraine, four large armed trucks and two cargo minivan Volkswagen without license plates arrived to the airport and parked near a transport aircraft at the end of one of runways. About fifteen people in black uniform, wearing masks and bullet-proof vests came out of these vans. Some of them were armed with assault rifles. These people have moved more than 40 heavy boxes from the trucks into the aircraft…. Later, one of the senior officials of the former Ministry of Revenue and Taxes reported that, according to his information, last night, at the order of one of the “new Ukrainian leaders” the entire gold reserve of Ukraine has been sent to in the United States. 

If true, that seizure should permit the Federal Reserve to stave off the collapse of the markets for a little while longer. A lot of the recent international activity looks disturbingly like pre-positioning for economic collapse.

History rises

Jerry Pournelle observes that those who know nothing of history cannot learn anything from it:

I am now convinced that no one in power in this nation knows any history whatsoever. Not even the history of the Seventy Years War with Bolshevism or what we call The Cold War – which now may become Cold War One if Barrack Hussein Obama de Santa Anna has his way. The State Department has, I am told, 3000 officers with PH.D.’s. One wonders in what subjects. Certainly not in history….

After the collapse of the Soviet System there was a period in which there was indeed a reset in the relationship between Russia and the United States, as Herman Kahn predicted there would be. Then came the Balkan crisis in which the ancient blood feuds dating back to the 13th Century were revived. That had lasted through the conquests of the Balkans and Hungary in the reign of Suleiman the Magnificent, and continued as the Turkish controls began to recede.  Then came the first Balkan Wars with their “Bulgarian Atrocities”, and the gradual liberation of Balkan nations, the brief existence of the Christian Kingdom of Montenegro, consolidation with Serbia, World War I and the dissolution of the Austrian Empire, formation of the Kingdom of Yugoslavia, German occupation of the Balkans, communist Tito vs. Christian monarchist Draza Mihailovich, Tito’s victory and consolidation of Yugoslavia, Tito’s defection from the Soviet bloc and his attempt to play the USSR against the West to his advantage, and the breakup of Yugoslavia at his death. And during all those times the ancient blood feuds and hatreds continued. All contending sides had factions who advocated and used ethnic cleansing as a tactic.

The Russians, as Russians always do – see the origins of The Great War — took the side of the Christian Slavs. This resulted in several standoffs between US and Russian forces, one or which came within minutes of a shooting engagement. The US began bombing Serbs, and US air strikes crippled the economy of the Lower Danube for at least a year. From the Russian view, the US chose sides: against Slavs. The truth of this is not so important as the deep seated belief among many Russians that it is true.The kind of army you have will dictate the kind of foreign policy you have.  The 300 Spartans bought time == just enough for the Spartans and Athenians to win at Plataea. A strategy of Technology is needed; so are Seals and Marines. The United States has been able to depend on the seas as moats behind which we can mobilize, with Big Bill Knudsen’s conversion of Detroit to making cannon, tanks, airplanes, machine guns, rifles, artillery in enormous quantities to arm the conscripted soldiers being trained by the old Regulars, and the Marines held on by their teeth in the South Pacific. But the pace of war has changed, and we no longer have Detroit. We seem to have forgotten some of the lessons of Task Force Smith and Korea. As the pace speeds, the force you must fight with is the force you have at hand and can transport.

Restructuring of the armed forces of the United States is needed, but it is far more complicated than simply fixing numbers and budgets. It also involves the schools and what is taught in them. And entrusting the safety of a Republic to paid soldiers has downsides.  Robert Heinlein and I debated for much of his life over conscription. His view was that any nation that needed conscripts had no right to exist. Mine was closer to Machiavelli’s. Conscription has the many benefits for a Republic, and its effects on liberty are not purely negative.  A nation needs paid professional Legions, but their existence allows them to be sent to wars we might be better off avoiding. Clinton would not have sent conscripts to the Balkans.

On the plus side, it could be worse. A President McCain wouldn’t even think twice before launching a land war in Asia. Sure, Obama’s outsourcing of American foreign policy to Goldman Sachs and their pet neocons of the New American Century is going to lead to a disaster, but at least the bankers understand that too much war is bad for business.

As long as the politicians are held in contempt, and as long as the people don’t get behind them, total war is out of the question. The world leaders to worry about are those who can achieve mental buy-in from the public, because they are the leaders with the potential to spark the global conflagration.

Why Putin invaded

It’s not too hard to understand once you realize that the anti-democratic coup in Ukraine had nothing to do with the Ukrainian people.

Arseniy Yatseniuk; born May 22, 1974 is a Ukrainian politician,
economist and lawyer who is the Prime Minister of Ukraine following the
parliament’s 2014 removal of Viktor Yanukovych from power. He was born to in a family of
Jewish-Ukrainian professors of the Chernivtsi University.  From September until November 2001, Arseniy served as an “acting” Minister of Economy of Crimea, and from November of the same year until January 2003, served as the official Minister of Economy of the Autonomous Republic of Crimea.

From November 2003 to February 2005, Yatsenyuk served as the first vice-president of the head of the National Bank of Ukraine under Serhiy Tyhypko. After Tyhypko left the National Bank, Arseniy Yatsenyuk was put in charge of the National Bank.

This is as if Obama was chased from the White House after a few weeks of demonstrations and it was announced that Alan Greenspan was now the president. This marks the second time in two years that a banker has been placed directly in power without being elected, first Italy and now Ukraine.

Well, this should end well. We all know how Eastern Europeans just love rich unelected Jews ruling over them. (Yatseniuk is actually Greek Orthodox, however.) I don’t know Russian or Ukrainian history well enough to know if this is supposed to be revenge for the pogroms or the sort of madness that led to the pogroms in the first place.

Why doesn’t Putin fear the US military?

This is an example of one of the likely reasons:

On Saturday, six gay and straight service members applied some of their finest makeup and lip synced to “I Wanna Dance with Somebody” in what is believed to be first drag queen and king show on an American military base. The show was thrown in support for the base’s recently formed OutServe-SLDN chapter, a nonprofit advocacy group for the army’s LGBT community.

Navy Lt. Marissa Greene told Stars and Stripes she only expected to sell 75 tickets for the variety show, but ended up selling more than 400 in ten days. The event went through the same approval process as other on-base fundraisers go through, with the only caveat being that it was not allowed to be labeled a “drag show” in its publicity materials. The show was warmly received by spectators, who rocked out to performances by the likes of Manny Nuff and Chocolate Sunrise (“a crowd favorite,” the website notes.)

Just a few years ago, performances like these would have been grounds for a possible discharge. The repeal of Don’t Ask, Don’t Tell has made it possible for events like this to occur.

This is the Club Play Dance Edition of the US Armed Forces, right up to the closeted Commander-in-Chief. Why on Earth would Putin take seriously a military that has decided to put gays and women on the front lines and gutted its capabilities in favor of foolish imperial adventures and social progress?

Putin may have seized the Crimea, but he had better watch himself carefully now or Obama will pose at him a second time. Oh, SNAP!

And for the Christian conservatives who cling to the belief that America is particularly favored by God, the fact that the military has been literally Sodomized should suffice to indicate otherwise.

Blowback in Ukraine

Apparently the whole CIA Spring strategy isn’t so effective when someone is prepared for it:

Ukrainian Prime Minister Arseniy Yatsenyuk said Sunday that his country was “on the brink of disaster” and personally blamed Russian President Vladimir Putin for bringing the two nations to the verge of war. Speaking to reporters at the Ukrainian parliament, Mr. Yatsenyuk called on the international community to rein in Mr. Putin and pressure him to remove troops from the Crimean peninsula, where a majority of residents are ethnic Russians but have Ukrainian passports.

“If President Putin wants to be the president who starts the war between two friendly and neighboring countries, he has [almost] reached this target,” Mr. Yatsenyuk said. “We are on the brink of disaster. There was no reason for the Russian Federation to invade Ukraine.”

Western diplomats doubt that the Ukrainian armed forces would be able to match up to the Russian forces already in control of the critical infrastructure and border points in the Crimea. Ukrainian leaders say that Russia has already sent an additional 6,000 troops to Crimea since tensions arose in the peninsula last week. The two countries have a military agreement that allows Moscow to base forces in the region, but Ukrainian officials accuse Moscow of violating that treaty by not informing Kiev of additional troops, and by moving forces without prior notice. Moscow says that it is in compliance of the accord.

Earlier Sunday, Ukraine’s interior minister said Russian officials had approached Ukrainian officers remaining in Crimea and offered them immediate Russian citizenship. “Across the entire territory of Crimea, Russian emissaries and military officers have invited the remaining Ukrainian interior ministry troops to take Russian citizenship and immediately receive Russian passports,” Arsen Avakov wrote on his Facebook page. “This appeal has been aimed at upper and middle officer corps troops.”

So, instead of Ukraine being independent and leaning towards Russia, the US-sponsored anti-democratic coup looks as if it will hand at least part of the nation right back to Russia. The thing is, there is no one who buys the whole “sovereign Ukraine” thing; everyone knows this is just the neocons latest project.

And meanwhile, China is sitting silently on the other side of the world, taking notes.

Not so stupid after all

Tina Fey’s comments about the visibility of Russia notwithstanding, it appears Sarah Palin’s foreign policy perspective was, in some ways, more perspicacious than Barack Obama’s:

During the 2008 presidential campaign, Republican vice presidential nominee Sarah Palin warned that if Senator Barack Obama were elected president, his “indecision” and “moral equivalence” may encourage Russia’s Vladimir Putin to invade Ukraine.

Palin said then: After the Russian Army invaded the nation of Georgia, Senator Obama’s reaction was one of indecision and moral equivalence, the kind of response that would only encourage Russia’s Putin to invade Ukraine next.

For those comments, she was mocked by the high-brow Foreign Policy magazine and its editor Blake Hounshell, who now is one of the editors of Politico magazine.  In light of recent events in Ukraine and concerns that Russia is getting its troops ready to cross the border into the neighboring nation, nobody seems to be laughing at or dismissing those comments now.

Hounshell wrote then that Palin’s comments were “strange” and “this is an extremely far-fetched scenario.”

“And given how Russia has been able to unsettle Ukraine’s pro-Western government without firing a shot, I don’t see why violence would be necessary to bring Kiev to heel,” Hounshell dismissively wrote.

That being said, the problem wasn’t Obama’s indecision, but rather the decision of the USA to support and encourage the anti-democratic revolutionaries who forced Ukraine’s democratically elected president to flee, thus handing Putin the international moral high ground and permitting him to send in Russian troops “to restore democracy” to Ukraine.

The real cost of the Obama foreign policy is that he has simply thrown away America’s second-greatest foreign policy asset; the credible claim that the USA held the moral high ground vis-a-vis its enemies. The Obama administration has never understood that even when one has overwhelming might on one’s side, the failure to establish at least a credible claim to the moral high ground means that those who might otherwise stay neutral will be forced into at least nominal opposition.

This is why Rome, in several centuries of world-spanning conquest, never fought a war that wasn’t “defensive”, and why Hitler went to the trouble of dressing dead bodies in Polish uniforms to excuse the Nazi invasion of Poland. The USA has gone from a global crusade for democracy to overthrowing multiple duly elected governments in a few short years, and this has not escaped the world’s attention.

Of course, President McCain would have been even worse, in foreign policy terms, than President Obama. Obama may have handed Putin an excuse to invade Ukraine, but at least he hasn’t started an open war with Russia… yet.