Sanctions Fever

Life goin' nowhere
Somebody help me
Somebody help me, yeah
--Bee Gees

Vladimir Putin attributes Europe's energy crisis and related probs to 'sanctions fever.' It is hard to disagree.

Watching a related special last nite on CNBC and host Brian Sullivan asked a guess whether he thought the West's sanctions on Russia were 'working.'

Perhaps he should have asked the millions around the world who face starvation and hypothermia due to these sanctions.

Sadly, this was predictable from the get go...

Frozen Policy

Hear the Salvation Army band
Down by the riverside
Bound to be a better ride
Than what you've got planned
--The Bangles

Europe seems headed toward a self-imposed depression. Sanctions against Russia, combined with previous 'green' policies, have exploded in the face of euro bureaucrats, leaving the EU facing a winter with insufficient heat, electricity, and gasoline.

Some gas and electric bills are already printing 5-10x year ago levels.

Policymakers appear to be doubling down by developing plans for rationing, price capping, and money printing.

Absent a quick policy about-face, it is difficult to see how the EU survives the next few months.

Rationing and Rationalizing

First, I thought we were fighting for God. Then, I realized we were fighting for wealth and land. I was ashamed.
--Tiberias (Kingdom of Heaven)

Germany has begun rationing energy-related resources to compensate for their self-imposed sanctions with Russia. Am sure German citizens are being told to suck it up. 

Unfortunately we know that if goods do not cross borders, armies will.

How long will it be before people of G-7 countries, absent power and heat, look longingly at Russian resources and rationalize war to seize oil and gas for the 'greater good?'

Ceiling Prices

We run though the day
And stare at the night
Is your head full of noises?
For me, well, it's just like
The Fourth of July
--Roger Daltrey

Among the dumbest of economic policies pursued by politicians is the price ceiling. The thinking is typical authoritarian. Think prices are too high? Then simply declare them lower. Set a maximum price for transactions on the market. Punish those who engage in transactions at a higher-than-mandated price.

What happens when producers are forcibly restrained from selling output at higher prices? Supply leaves the market. Shortages develop. 

Not only does present supply leave the market, but future sources do as well. Entrepreneurs are less motivated to develop marginal or substitute sources of supply when the profit signal of higher prices is suppressed.

Over time, prices are likely to be much higher--particularly if it takes a long time to replace capacity once it is taken off the market by the caps.

Cogitate on that as G-7 bureaucrats mull price caps on Russian oil.

Suck It Up

"Whatever it takes is something that happens to somebody else."
--Jake Lo

As Americans increasingly question the logic of a distant war--an in particular the associated sanctions--that are jacking domestic cost of living higher, the administration is telling the citizenry to 'suck it up.'

When asked how long US drivers should be expected to pay a 'war premium' for gasoline, the president responded, "As long as it takes."

Hard to imagine replies like this will play well at the ballot box.

Commitment to Stupidity

"He chose...poorly."
--Grail Knight (Indiana Jones and the Last Crusade)

The larger question for big government types is this: Have not the past couple of years demonstrated the sheer ineptitude of central planning?

Public health. War and sanctions. Economic and monetary policy. Et al.

Hayek called it the fatal conceit--the belief that bureaucrats in a room can choose better than billions of individuals.

Ongoing belief in central planning constitutes a genuine commitment to stupidity.

War Fatigue

Armchair warriors often fail
And we've been poisoned by these fairy tales
--Don Henley

Governments wanting to engage in war with foreign entities must win consent of the citizenry to do so. If they view the war as illegitimate, the people have capacity to shut the war down via several avenues, including voting officials out of office, withholding funds for military resources, or even overthrowing the regime prosecuting illegitimate war.

Consequently, governments must convince people that their war is just. They must do so at the outset of the conflict, and then continue to do so. Because war requires ongoing sacrifice in order to fund the war effort, it is possible that enthusiasm for war will wane as people increasingly regret what they must forfeit as conflict drags on.

It appears that support for US involvement in the Ukraine conflict is already waning. Surveys suggest that the American public is increasingly wary of US efforts to harm Russia in manners that hurt the domestic economy.

That, of course, is precisely what sanctions do. Any effort to restrict production and trade with entities abroad damages standard of living at home.

As more Americans realize that sanctions are not unilateral, this administration loses its public grant of legitimacy for engaging the country in war.

Art of Hybrid War

"War is a continuation of politics by other means--von Clausewitz."
--Captain Frank Ramsey (Crimson Tide)

Interesting post that fades mainstream media claims that things are going poorly for Russia in Ukraine. The central claim is that Russia is slowly and deliberately tightening the vise around territory that is strategically meaningful. 

Moreover, by keeping the pace deliberate, Russia puts more pressure on Western economic systems that have essentially sanctioned themselves into positions of peril. That peril includes long-term damage to a dollar-denominated financial system.

Russia may be honing the art of hybrid war.

Burying Liberty...Again

"Why should I trade one tyrant 3000 miles away for three thousand tyrants one mile away? An elected legislature can trample a man's rights as easily as a king can."

--Benjamin Martin (The Patriot)

Judge Nap rails against the unconstitutional seizing of Russian property, the freezing of Russian bank accounts, and the barring of contractual trade with Russian partners--all done under the guise of sanctions imposed after the Ukraine invasion. These sanctions violate both the Fourth Amendment, which requires warrants specific to place and person before property can be detained, and the Fifth Amendment, which requires due process before property can be expropriated.

A common response to charges such as these is that the Constitution only protects US citizens and not foreigners. This is wrong. The wrongheadedness of this line of thought is revealed by considering the Constitution's conceptual basis.

The formation of the United States is grounded in natural law. Natural law posits that all men are created equal at birth, meaning that we all have equal rights to life, to the freedom to pursue our interests as long as we do not forcibly intrude on the pursuits of others, and to the property that our pursuits might generate.

These natural rights are granted to each of us by our creator and as a condition of our humanity. They are unalienable, meaning that we are free to exercise our natural rights unencumbered by government interference. This is the founding principle of liberty. 

Government's sole just purpose is to protect our natural rights. It can only interfere in an individual's pursuits when it is suspected that a person has forcibly compromised the natural rights of someone else. However, government must carefully follow just legal processes including those specified by the Fourth and Fifth Amendments.

If the natural law basis of the Constitution is to be upheld, then it makes no sense to limit its application citizens of the United States. Americans were not the only people born to the 'self-evident' truth that all men were created equal. All have been endowed with the same set of natural rights. When government tramples on the natural rights of any individual, it has done wrong.

As the Judge notes at the end of his column: "War is the health of the state and the graveyard of liberty." Actions of the US government taken under the auspices of the Ukraine conflict demonstrate once again America's lack of leadership in championing the very principles upon which our nation was founded.

War finds the United States burying liberty once again.

Manufactured Chaos

"I want this country to know that we stand on the edge of oblivion! I want every man, woman, and child to understand how close we are to chaos! I want everyone to remember why they need us!
--Sutler (V for Vendetta)

Article questions whether Russia is truly the target of recent sanctions. The thought has crossed my mind as well.

If the West truly wanted to hurt Russia, then it would increase production of oil and flood the world with supply. Not only would this crush prices and cripple the Russian economy, but it would provide relief for consumers struggling with inflationary concerns.

But Western countries have not done so. In fact, they have acted in manners that squeeze oil prices higher.

Sanctions that restrict Russian food exports also make little sense. Because Russia is a net food exporter, restrictions on trade mean Russia has more food and its trading partners have less.

Consequently, the sweeping sanctions ostensibly meant to cripple the Russian economy are driving up prices in the West and increasing risk of shortages in economies already facing inflationary pressures not seen in generations.

On the other hand, higher prices and economic disruptions play into the hands of proponents of the Great Reset. The thinking is that higher oil prices will motivate more investment in green energy. And that economic turbulence will increase dependence on 'enlightened' one world government--while trimming some population deemed to be 'excess' in the process.

Because the Great Resetters believe that they assimilate power in times of crisis, they are endeavoring to create them. Elections, Covid, Ukraine. 

Manufactured chaos.

Ruble Round Trip

Call it morning driving through the sound of
In and out the valley
--Yes

After getting smoked on Western sanctions, the ruble has clawed all the way back to pre-invasion levels.

Lotta manipulation (both ways), so it's difficult to assess precisely what has driven recovery. That said, hard not to include these factors:

Russia's strong commodity position

Ineffectiveness of sanctions over time

Russian proclivity toward gold

One thing seems certain. Those engaging in financial system warfare vs Russia early on were not counting on a ruble round trip.

position in gold

Lead Through Neutrality

"His voice traveled with such a still purpose. It was more than a voice...a man more than a man. He said, 'Blessed are the merciful, for they shall obtain mercy. Blessed are the peacemakers, for they shall be called the children of God.'"
--Esther (Ben-Hur)

Country A and B are engaging in armed conflict. Country C, if it truly desires peace, does not pick a side. It does not join A or B in battle. It does not supply arms to A or B. It doesn't levy economic sanctions on A or B. It does not berate A or B in the media.

If it does any of these, then C reveals itself as a partisan cohort of war.

The peaceful stance is neutrality. Engage in trade with A and B. Seek to mediate, to understand the concerns of both sides. Volunteer to host discussions between A and B that would bring an end to violence.

Lead through neutrality.

Acts of War

Guy de Lusignon: Give me a war.
Reynald de Chatillon: That is what I do.
--Kingdom of Heaven

In the context of multinational geopolitics, an act of war is aggression done by country A on one or more other countries B of such magnitude that B declares that A's violence exceeds a threshold that justifies reciprocal violence by B toward A. 

While B's reciprocal violence, if taken, is often framed as 'self-defense,' it very well may be offensive in nature. In fact, A and B may engage in ongoing conflict where each side exchanges offensive salvos and defensive parries during the campaign.

Clearly, claiming something to be an act of war is subjective. How much damage must be done, and how many casualties must result before belligerent behavior is deemed an act of war?

Moreover, does a shot even have to be fired? After all, there are surely ways to do violence on others without discharging a weapon directly at them.

For instance, trade sanctions seek to hurt people of a country economically. That economic strife may maim or kill people--both in the country that is the target of sanctions and in other nations as well. 

Arms may only be involved to the extent that they need to be brandished to enforce the sanctions. Quite ironically, those guns often must be flashed at the sanctioner's own citizens to remind them of the consequences of trading with the enemy.

Although they almost certainly regard themselves as 'peaceful,' countries that levy trade sanctions are acting aggressively toward others--and toward their own people.

Petrodollars to Petroyuan

When situations never change
Tomorrow looks unsure
Don't leave your destiny to chance
What are you waiting for?
--Swing Out Sister

Courtesy of the 1944 Bretton Woods Agreement, the US dollar has enjoyed reserve currency status for the better part of a century. A reserve currency is a money that circulates extensively internationally. It is deemed the standard used to price and execute financial transactions. As such, it is constantly in demand. Banks worldwide must keep piles of reserve currency on hand.

Strong international demand for the USD has been a boon for the federal government. Money can be printed and debt can be issued without having to worry about destroying the value of the currency. 

It is safe to say that the financial position of the United States would be in a much different place were it not for the USD's reserve currency status.

No market demonstrates USD reserve currency privilege more than the international oil market. For decades, Saudi Arabia has priced barrels of crude in USD. Any non-US entity seeking to buy crude from the Sauds has to pay in USD, which lights a fire under dollar demand in forex markets.

Plus, the US gets an extra kicker. Because it can print gobs of USD with little penalty, the US can do so to buy oil on the international market. Let's see...paper dollars printed out of thin air versus a barrel of crude. 

Who gets the better deal? 

The USD's use in oil trade has led to the term 'petrodollar.' The US has reaped huge gains from the petrodollar.

However, the age of the petrodollar may be coming to an end. Financial system warfare currently being waged as part of the Ukraine conflict is awakening countries to their vulnerability, and prompting them to investigate ways to reduce dependence on the USD. By doing so, these nations could sidestep crushing sanctions that might be hurled toward them in the event that they cross the US in some manner.

Seeking alternatives to petrodollars in oil markets would constitute  a significant step in that direction. 

It should not be surprising, then, to learn that countries are experimenting with pricing oil in yuan rather than in USD. In an uncertain world, it makes sense to diversify--even more so when some of that uncertainty involves a country that might decide to weaponize its currency against you.

By engaging in financial warfare the United States appears to be looking the proverbial gift horse in the mouth. The gift of reserve currency status may be rescinded as countries scramble to increase their sovereignty in a sanction-heavy world.

Movement from petrodollars toward petroyuan demonstrates.

Sanctions

"You arrogant ass. You've killed us!"
--Andrei Bonovia (The Hunt for Red October)

Over the past couple of weeks, Western governments have levied countless sanctions on Russia. In this context, sanctions are trade restrictions against a foreign country meant to punish that state for behavior deemed undesirable or bad. Russia's invasion of Ukraine sparked a deluge of sanctions ranging from curtailing or banning trade of particular commodities to freezing Russian bank accounts.

Sanctions aim at achieving various political objectives. One is to make the sanctioned country's population hurt to the point where it demands that its ruling regime cease enacting policies that outsiders find objectionable. Another objective is to weaken a country economically and financially so that it depletes resources for conducting belligerent activities. A third objective might be to weaken a state to the point where it can be overthrown by direct attack.

Despite their popularity, sanctions have marginal track records of success. One reason for this is that sanctions require solidarity among outside states in order to be effective. If only a few countries honor the restrictions, then the targeted state can reconfigure its supply chains toward other countries open to trade. The economic strain of sanctions can therefore be mitigated by developing alternative trade channels.

Sanctions also fail because they commonly strengthen resolve in sanctioned states. When freedom to trade with outsiders is forcibly restrained, then nationalistic tendencies increase among a country's population. Rather than creating animosity toward a domestic regime, sanctions often unify nations behind that regime.

It also seems lost on politicians that the economic penalties imposed by sanctions work both ways. When trade is restricted, the productivity benefits of specialization decline as countries diversify to become more self-sufficient. Less output is produced, and standard of living falls--not just for the sanctioned target, but for all countries--even for those who decline to honor the sanctions. In this manner, sanctions behave like tariffs. 

Who is hurt the worst? The world's poor. Because those at the bottom of the economic pyramid have the most to gain from specialization and trade, they become 'collateral damage' when prosperous countries impose trade sanctions. 

Consequently, sanctions themselves may be seen as acts of war. Although they are often levied in response to violence, sanctions are also violent in nature. They forcibly restrict trade--often in manners aimed at hurting others--particularly civilians. In this sense, trade sanctions bear similarity to wartime policies such as the Allied bombing of German and Japanese cities during WWII. 

While sanctions seem to satisfy popular urges to 'do something,' they possess capacity to do more damage than the bad behavior that those restrictions purportedly aim to punish.

Collective Security

War, children
It's just a shot away
It's just a shot away
--The Rolling Stones

Whenever a 'crisis' comes along, it is tempting to assume that this time is different--that we're at a unique point in history never before contemplated. With a little digging, however, one finds that this is rarely the case.

Murray Rothbard provides useful historical context (penned in 1982) for the present Ukraine situation, particularly as it relates to the notion of 'collective security' and interventionism. Collective security is the philosophy upon which the United Nations and NATO were founded. Each nation state is viewed as an 'individual.' When one state 'aggresses against' an individual state, then it is the duty of the collective to punish the 'aggressor.' No declaration of war is necessary because the collective response is a 'police action.' All nations in the collective, including their media organs, are expected to fall in line.

The left warmly embraced the collective security concept--so much so that they were ardent supporters of US entry into the Korean and Vietnam wars. 

Opposition to war was instead a characteristic of the 'old right.' From the 1930s to the 1950s, the old right was regarded as 'isolationist,' objecting American entry into WWII, the Marshall Plan, NATO, conscription of troops, and Korea. Among the politicians in this group were Robert Taft and Howard Buffett (Warren's dad). Garet Garrett and John T. Flynn were among the author/analysts.

The old right isolationists saw grave flaws in the collective security concept. One was that, in reality, there is no single world government or police force. Instead, there are hundreds of nation states, each with their own war-making capacity. In some cases, this capacity is quite formidable. Consequently, when gangs of states wade into a conflict, they invariably widen it. Every controversy invites the gang to decide who is the 'aggressor,' and then attach to the side considered virtuous.

It stands to reason, then, that collective security systems have the potential to turn local squabbles into global conflagrations.

Another problem with the collective security notion is that it can be difficult if not impossible to accurately identify the uniquely guilty parties in conflicts between states. Although the property rights of individuals make actions by an aggressor relatively easy to finger, the legitimate boundary lines of each state are more difficult to discern. This is because state borders are rarely demarcated by just and proper means. Instead, states generally exist through coercion over citizens and subjects; state boundaries are invariably determined by conquest and violence. 

Consequently, by condemning one state for crossing the borders of another, collective security systems implicitly recognize the validity of existing boundaries. Why should boundaries of a state be any more legitimate now than they were one hundred years ago? Why should borders be enshrined such that crossing them leads all members of the security collective to wage war, and to force their citizens to kill and die?

It is straightforward to apply the limitations of collective security to the Ukraine situation. Indeed, one can find both of the above problems raised by Vladimir Putin in his address explaining the rationale behind his country's action in Ukraine.

Once again, it seems that we have failed to learn from history.

Stepping on Gas

Down in the pleasure center
Hell bent or heaven sent
Listen to the propaganda
Listen to the latest slander
--Elvis Costello

...Speaking of oil, the administration announced this morning that, as part of the accumulating pile of sanctions levied against Russia, the US would ban Russian oil and gas imports (which amount to about 10% of total imports). Crude immediately shot higher on the news.

Domestic gas prices are now at record highs. In some places they are touching $7/gallon.

Two observations. One is that much of the recent craziness in commodity prices can be attributed to government intervention (read: force). Regulation, tariffs, sanctions, war of course. What we are seeing is not the outcome of people voluntarily and peacefully engaging in production and trade.

Stated differently, the craziness has been imposed.

The second observation is that, for an administration seeking to boost sagging poll numbers, forcibly raising gas prices in front of voters seems a strange approach...

position in CVX

Oil and Recession

Out where the river broke
The bloodwood and the desert oak
Holden wrecks and boiling diesels
Steam in forty-five degrees
--Midnight Oil

When crude spikes well above trend, recession is usually imminent.

Crude is currently spiking well above trend, and current sits at about $116.

Gas Pump

My friend the communist
Holds meetings in his RV
I can't afford his gas
So I'm stuck here watching TV
--Sheryle Crow

Rocketing gas prices are not just the result of bad energy policy, but bad policy overall. Monetary, fiscal, economic, trade, etc...

When government regulation obstructs peaceful cooperation and exchange, outcomes will be compromised.

Specialization and Uncertainty

Do you remember
When you got your lucky break?
You're looking back now
And it seems like a mistake
--John Waite

In previous missives we discussed the benefits and risks associated with specialized work. Specialization promotes higher productivity through learning by doing and lower switching costs. Fully realizing these benefits requires free trade with other specialists in order to satisfy each producer's spectrum of needs. If trade is restricted, then some needs will go unmet--unless producers diversify into multiple lines of work, thereby reversing in full circle fashion the productivity gains from specialization.

Specialized producers also face elevated risk of obsolescence compared to more diversified producers. Due to technological change, competition, or evolving consumer tastes, particular lines of work may, at some point in time, no longer be necessary. Because specialized work typically requires commitments such as expensive schooling, investment in expensive narrow purpose equipment, and engrained work routines, adapting to changing environments can be difficult.

How can producers manage the risks associated with specialization? 

First, let's note the crucial role that the environment--particularly environmental uncertainty--plays in answering this question. While many conceptualizations of environmental uncertainty have been developed, an important one in our context involves what is called state uncertainty. Specifically, environmental uncertainty can be seen as the extent to which current or future states of the world can be understood or predicted. When events are understood or foreseen with less clarity, then environments are said to be more uncertain.

The central proposition for our purposes can be stated as follows:

Proposition: The higher the level of environmental uncertainty, the lower the appropriate level of specialized work.

If environments are completely certain and predictable, then high levels of specialization are appropriate. There is little risk of change, or at least surprise change, that could not be anticipated in ways that would place specialized producers in vulnerable positions.

As uncertainty increases, however, so does vulnerability. Due to the irreversibility of their production commitments, specialized producers may be incapable of responding to unforeseen events or conditions in a timely manner, thereby threatening their adaptability to changing conditions.

Consequently, degree of specialization should go down as level of environmental uncertainty goes up.

But what implications does the relationship between specialization and uncertainty have on production planning and work design? What strategies are available to producers that allow them to be as productive as possible--while maintaining adaptive capacity essential for coping with uncertainty?

We'll discuss next time.