[Editor's note: this piece, by Richard M. Ebeling, was originally published at EpicTimes]
We live at a time when politicians and bureaucrats only know one public policy: more and bigger government. Yet, there was a time when even those who served in government defended limited and smaller government. One of the greatest of these died one hundred years ago on August 27, 1914, the Austrian economist Eugen von Böhm-Bawerk.
Böhm-Bawerk is most famous as one of the leading critics of Marxism and socialism in the years before the First World War. He is equally famous as one of the developers of “marginal utility” theory as the basis of showing the logic and workings of the competitive market price system.
But he also served three times as the finance minister of the old Austro-Hungarian Empire, during which he staunchly fought for lower government spending and taxing, balanced budgets, and a sound monetary system based on the gold standard.
Danger of Out-of-Control Government Spending
Even after Böhm-Bawerk had left public office he continued to warn of the dangers of uncontrolled government spending and borrowing as the road to ruin in his native Austria-Hungary, and in words that ring as true today as when he wrote them a century ago.
In January 1914, just a little more than a half a year before the start of the First World War, Böhm-Bawerk said in a series of articles in one of the most prominent Vienna newspapers that the Austrian government was following a policy of fiscal irresponsibility. During the preceding three years, government expenditures had increased by 60 percent, and for each of these years the government’s deficit had equaled approximately 15 percent of total spending.
The reason, Böhm-Bawerk said, was that the Austrian parliament and government were enveloped in a spider’s web of special-interest politics. Made up of a large number of different linguistic and national groups, the Austro-Hungarian Empire was being corrupted through abuse of the democratic process, with each interest group using the political system to gain privileges and favors at the expense of others.
We have seen innumerable variations of the vexing game of trying to generate political contentment through material concessions. If formerly the Parliaments were the guardians of thrift, they are today far more like its sworn enemies.
Nowadays the political and nationalist parties … are in the habit of cultivating a greed of all kinds of benefits for their co-nationals or constituencies that they regard as a veritable duty, and should the political situation be correspondingly favorable, that is to say correspondingly unfavorable for the Government, then political pressure will produce what is wanted. Often enough, though, because of the carefully calculated rivalry and jealousy between parties, what has been granted to one [group] has also to be conceded to others — from a single costly concession springs a whole bundle of costly concessions.
He accused the Austrian government of having “squandered amidst our good fortune [of economic prosperity] everything, but everything, down to the last penny, that could be grabbed by tightening the tax-screw and anticipating future sources of income to the upper limit” by borrowing in the present at the expense of the future.
For some time, he said, “a very large number of our public authorities have been living beyond their means.” Such a fiscal policy, Böhm-Bawerk feared, was threatening the long-run financial stability and soundness of the entire country.
Eight months later, in August 1914, Austria-Hungary and the rest of Europe stumbled into the cataclysm that became World War I. And far more than merely the finances of the Austro-Hungarian Empire were in ruins when that war ended four years later, since the Empire itself disappeared from the map of Europe.
A Man of Honesty and Integrity
Eugen von Böhm-Bawerk was born on February 12, 1851 in Brno, capital of the Austrian province of Moravia (now the eastern portion of the Czech Republic). He died on August 27, 1914, at the age of 63, just as the First World War was beginning.
Ten years after Böhm-Bawerk’s death, one of his students, the Austrian economist Ludwig von Mises, wrote a memorial essay about his teacher. Mises said:
Eugen von Böhm-Bawerk will remain unforgettable to all who have known him. The students who were fortunate enough to be members of his seminar [at the University of Vienna] will never lose what they have gained from the contact with this great mind. To the politicians who have come into contact with the statesman, his extreme honesty, selflessness and dedication to duty will forever remain a shining example.
And no citizen of this country [Austria] should ever forget the last Austrian minister offinance who, in spite of all obstacles, was seriously trying to maintain order of the public finances and to prevent the approaching financial catastrophe. Even when all those who have been personally close to Böhm-Bawerk will have left this life, his scientific work will continue to live and bear fruit.
Another of Böhm-Bawerk’s students, Joseph A. Schumpeter, spoke in the same glowing terms of his teacher, saying, “he was not only one of the most brilliant figures in the scientific life of his time, but also an example of that rarest of statesmen, a great minister of finance. … As a public servant, he stood up to the most difficult and thankless task of politics, the task of defending sound financial principles.”
The scientific contributions to which both Mises and Schumpeter referred were Böhm-Bawerk’s writings on what has become known as the Austrian theory of capital and interest, and his equally insightful formulation of the Austrian theory of value and price.
The Austrian Theory of Subjective Value
The Austrian school of economics began 1871 with the publication of Carl Menger’s Principles of Economics. In this work, Menger challenged the fundamental premises of the classical economists, from Adam Smith through David Ricardo to John Stuart Mill. Menger argued that the labor theory of value was flawed in presuming that the value of goods was determined by the relative quantities of labor that had been expended in their manufacture.
Instead, Menger formulated a subjective theory of value, reasoning that value originates in the mind of an evaluator. The value of means reflects the value of the ends they might enable the evaluator to obtain. Labor, therefore, like raw materials and other resources, derives value from the value of the goods it can produce. From this starting point Menger outlined a theory of the value of goods and factors of production, and a theory of the limits of exchange and the formation of prices.
Böhm-Bawerk and his future brother-in-law and also later-to-be-famous contributor to the Austrian school, Friedrich von Wieser, came across Menger’s book shortly after its publication. Both immediately saw the significance of the new subjective approach for the development of economic theory.
In the mid-1870s, Böhm-Bawerk entered the Austrian civil service, soon rising in rank in the Ministry of Finance working on reforming the Austrian tax system. But in 1880, with Menger’s assistance, Böhm-Bawerk was appointed a professor at the University of Innsbruck, a position he held until 1889.
Böhm-Bawerk’s Writings on Value and Price
During this period he wrote the two books that were to establish his reputation as one of the leading economists of his time, Capital and Interest , Vol. I: History and Critique of Interest Theories (1884) and Vol. II: Positive Theory of Capital(1889). A third volume, Further Essays on Capital and Interest, appeared in 1914 shortly before his death.
In the first volume of Capital and Interest, Böhm-Bawerk presented a wide and detailed critical study of theories of the origin of and basis for interest from the ancient world to his own time. But it was in the second work, in which he offered a Positive Theory of Capital, that Böhm-Bawerk’s major contribution to the body of Austrian economics may be found. In the middle of the volume is a 135-page digression in which he presents a refined statement of the Austrian subjective theory of value and price. He develops in meticulous detail the theory of marginal utility, showing the logic of how individuals come to evaluate and weigh alternatives among which they may choose and the process that leads to decisions to select certain preferred combinations guided by the marginal principle. And he shows how the same concept of marginal utility explains the origin and significance of cost and the assigned valuations to the factors of production.
In the section on price formation, Böhm-Bawerk develops a theory of how the subjective valuations of buyers and sellers create incentives for the parties on both sides of the market to initiate pricing bids and offers. He explains how the logic of price creation by the market participants also determines the range in which any market-clearing, or equilibrium, price must finally settle, given the maximum demand prices and the minimum supply prices, respectively, of the competing buyers and sellers.
Capital and Time Investment as the Sources of Prosperity
It is impossible to do full justice to Böhm-Bawerk’s theory of capital and interest. But in the barest of outlines, he argued that for man to attain his various desired ends he must discover the causal processes through which labor and resources at his disposal may be used for his purposes. Central to this discovery process is the insight that often the most effective path to a desired goal is through “roundabout” methods of production. A man will be able to catch more fish in a shorter amount of time if he first devotes the time to constructing a fishing net out of vines, hollowing out a tree trunk as a canoe, and carving a tree branch into a paddle.
Greater productivity will often be forthcoming in the future if the individual is willing to undertake, therefore, a certain “period of production,” during which resources and labor are set to work to manufacture the capital — the fishing net, canoe, and paddle — that is then employed to paddle out into the lagoon where larger and more fish may be available.
But the time involved to undertake and implement these more roundabout methods of production involve a cost. The individual must be willing to forgo (often less productive) production activities in the more immediate future (wading into the lagoon using a tree branch as a spear) because that labor and those resources are tied up in a more time-consuming method of production, the more productive results from which will only be forthcoming later.
Interest on a Loan Reflects the Value of Time
This led Böhm-Bawerk to his theory of interest. Obviously, individuals evaluating the production possibilities just discussed must weigh ends available sooner versus other (perhaps more productive) ends that might be obtainable later. As a rule, Böhm-Bawerk argued, individuals prefer goods sooner rather than later.
Each individual places a premium on goods available in the present and discounts to some degree goods that can only be achieved further in the future. Since individuals have different premiums and discounts (time-preferences), there are potential mutual gains from trade. That is the source of the rate of interest: it is the price of trading consumption and production goods across time.
Böhm-Bawerk Refutes Marx’s Critique of Capitalism
One of Böhm-Bawerk’s most important applications of his theory was the refutation of the Marxian exploitation theory that employers make profits by depriving workers of the full value of what their labor produces. He presented his critique of Marx’s theory in the first volume of Capital and Interest and in a long essay originally published in 1896 on the “Unresolved Contradictions in the Marxian Economic System.” In essence, Böhm-Bawerk argued that Marx had confused interest with profit. In the long run no profits can continue to be earned in a competitive market because entrepreneurs will bid up the prices of factors of production and compete down the prices of consumer goods.
But all production takes time. If that period is of any significant length, the workers must be able to sustain themselves until the product is ready for sale. If they are unwilling or unable to sustain themselves, someone else must advance the money (wages) to enable them to consume in the meantime.
This, Böhm-Bawerk explained, is what the capitalist does. He saves, forgoing consumption or other uses of his wealth, and those savings are the source of the workers’ wages during the production process. What Marx called the capitalists’ “exploitative profits” Böhm-Bawerk showed to be the implicit interest payment for advancing money to workers during the time-consuming, roundabout processes of production.
Defending Fiscal Restraint in the Austrian Finance Ministry
In 1889, Böhm-Bawerk was called back from the academic world to the Austrian Ministry of Finance, where he worked on reforming the systems of direct and indirect taxation. He was promoted to head of the tax department in 1891. A year later he was vice president of the national commission that proposed putting Austria-Hungary on a gold standard as a means of establishing a sound monetary system free from direct government manipulation of the monetary printing press.
Three times he served as minister of finance, briefly in 1895, again in 1896–1897, and then from 1900 to 1904. During the last four-year term Böhm-Bawerk demonstrated his commitment to fiscal conservatism, with government spending and taxing kept strictly under control.
However, Ernest von Koerber, the Austrian prime minister in whose government Böhm-Bawerk served, devised a grandiose and vastly expensive public works scheme in the name of economic development. An extensive network of railway lines and canals were to be constructed to connect various parts of the Austro-Hungarian Empire — subsidizing in the process a wide variety of special-interest groups in what today would be described as a “stimulus” program for supposed “jobs-creation.”
Böhm-Bawerk tirelessly fought against what he considered fiscal extravagance that would require higher taxes and greater debt when there was no persuasive evidence that the industrial benefits would justify the expense. At Council of Ministers meetings Böhm-Bawerk even boldly argued against spending proposals presented by the Austrian Emperor, Franz Josef, who presided over the sessions.
When finally he resigned from the Ministry of Finance in October 1904, Böhm-Bawerk had succeeded in preventing most of Prime Minister Koerber’s giant spending project. But he chose to step down because of what he considered to be corrupt financial “irregularities” in the defense budget of the Austrian military.
However, Böhm-Bawerk’s 1914 articles on government finance indicate that the wave of government spending he had battled so hard against broke through once he was no longer there to fight it.
Political Control or Economic Law
A few months after his passing, in December 1914, his last essay appeared in print, a lengthy piece on “Control or Economic Law?” He explained that various interest groups in society, most especially trade unions, suffer from a false conception that through their use or the threat of force, they are able to raise wages permanently above the market’s estimate of the value of various types of labor.
Arbitrarily setting wages and prices higher than what employers and buyers think labor and goods are worth — such as with a government-mandated minimum wage law — merely prices some labor and goods out of the market.
Furthermore, when unions impose high nonmarket wages on the employers in an industry, the unions succeed only in temporarily eating into the employers’ profit margins and creating the incentive for those employers to leave that sector of the economy and take with them those workers’ jobs.
What makes the real wages of workers rise in the long run, Böhm-Bawerk argued, was capital formation and investment in those more roundabout methods of production that increase the productivity of workers and therefore make their labor services more valuable in the long run, while also increasing the quantity of goods and services they can buy with their market wages.
To his last, Eugen von Böhm-Bawerk defended reason and the logic of the market against the emotional appeals and faulty reasoning of those who wished to use power and the government to acquire from others what they could not obtain through free competition. His contributions to economic theory and economic policy show him as one of the greatest economists of all time, as well as his example as a principled man of uncompromising integrity who in the political arena unswervingly fought for the free market and limited government.
“I say to all those who bet against Greece and against Europe: You lost and Greece won. You lost and Europe won.” –Jean-Claude Juncker, former prime minister of Luxembourg and president of the Eurogroup of EU Finance Ministers, 2014
“We have indeed at the moment little cause for pride: As a profession we have made a mess of things.” –Friedrich Hayek, Nobel Laureate in Economic Science, 1974
Jean-Claude Juncker is a prominent exception to the recent trend of economic and monetary officials openly expressing doubt that their interventionist policies are producing the desired results. In recent months, central bankers, the International Monetary Fund, the Bank for International Settlements, and a number of prestigious academic economists have expressed serious concern that their policies are not working and that, if anything, the risks of another 2008-esque global financial crisis are building. Thus we have arrived at a ‘Crisis of Interventionism’ as the consequences of unprecedented monetary and fiscal stimulus become evident, fuelling a surge in economic nationalism around the world, threatening the end of globalisation and the outbreak of trade wars. Indeed, a tech trade war may already have started. This is is perhaps the least appreciated risk to financial markets at present. How should investors prepare?
THE FATAL CONCEIT
Friedrich Hayek was the first Austrian School economist to win the Nobel Memorial Prize in Economic Science. Yet Hayek took issue with the characterisation of modern economics as a ‘science’ in the conventional sense. This is because the scientific method requires theories to be falsifiable and repeatable under stable conditions. Hayek knew this to be impossible in the real world in which dynamic, spontaneous human action takes place in response to an incalculable number of exogenous and endogenous variables.
Moreover, Hayek believed that, due to the complexity of a modern economy, the very idea that someone can possibly understand how it works to the point of justifying trying to influence or distort prices is nonsensical in theory and dangerous in practise. Thus he termed such hubris in economic theory ‘The Pretence of Knowledge’ and, in economic policy, ‘The Fatal Conceit’.
History provides much evidence that Hayek was correct. Interventionism has consistently failed either to produce the desired results or has caused new, unanticipated problems, such as in the 1920s and 1930s, for example, an age of particularly active economic policy activism in most of the world. Indeed, as Hayek wrote in his most famous work, The Road to Serfdom, economic officials tend to respond to the unintended consequences of their failed interventions with ever more interventionism, eventually leading to severe restrictions of economic liberty, such as those observed under socialist or communist regimes.
Hayek thus took advantage of his Nobel award to warn the economics profession that, by embracing a flawed, ‘pseudo-scientific method’ to justify interventionism, it was doing itself and society at large a great disservice:
The conflict between what in its present mood the public expects science to achieve in satisfaction of popular hopes and what is really in its power is a serious matter because, even if the true scientists should all recognize the limitations of what they can do in the field of human affairs, so long as the public expects more there will always be some who will pretend, and perhaps honestly believe, that they can do more to meet popular demands than is really in their power. It is often difficult enough for the expert, and certainly in many instances impossible for the layman, to distinguish between legitimate and illegitimate claims advanced in the name of science…
If we are to safeguard the reputation of economic science, and to prevent the arrogation of knowledge based on a superficial similarity of procedure with that of the physical sciences, much effort will have to be directed toward debunking such arrogations, some of which have by now become the vested interests of established university departments.
Hayek made these comments in 1974. If only the economics profession had listened. Instead, it continued with the pseudo-science, full-steam ahead. That said, by 1974 a backlash against traditional Keynesian-style intervention had already begun, led by, among others, Milton Friedman. But Friedman too, brilliant as he no doubt was, was seduced also by the culture of pseudo-science and, in his monetary theories, for which he won his Nobel prize in 1976, he replaced a Keynesian set of unscientific, non-falsifiable, intervention-justifying equations with a Monetarist set instead.
Economic interventionism did, however, fall out of intellectual favour following the disastrous late-1970s stagflation and subsequent deep recession of the early 1980s—in the US, the worst since WWII. It never really fell out of policy, however. The US Federal Reserve, for example, facilitated one bubble after another in US stock and/or property prices in the period 1987-2007 by employing an increasingly activist monetary policy. As we know, this culminated in the spectacular events of 2008, which unleased a global wave of intervention unparalleled in modern economic history.
THE KEYNESIANS’ NEW CLOTHES
Long out of fashion, Keynesian theory and practice returned to the fore as the 2008 crisis unfolded. Some boldly claimed at the time that “we are all Keynesians now.” Activist economic interventionism became the norm across most developed and developing economies. In some countries, this has taken a more fiscal policy form; in others the emphasis has been more on monetary policy. Now six years on, with most countries still running historically large fiscal deficits and with interest rates almost universally at or near record lows, it is entirely understandable that the economics profession is beginning to ask itself whether the interventions it recommended are working as expected or desired.
While there have always been disputes around the margins of post-2008 interventionist policies, beginning in 2012 these became considerably more significant and frequent. In a previous report, THE KEYNESIANS’ NEW CLOTHES, I focused on precisely this development:
In its most recent World Economic Outlook, the International Monetary Fund (IMF) surveys the evidence of austerity in practice and does not like what it finds. In particular, the IMF notes that the multiplier associated with fiscal tightening seems to be rather larger than they had previously assumed. That is, for each unit of fiscal tightening, there is a greater economic contraction than anticipated. This results in a larger shrinkage of the economy and has the unfortunate result of pushing up the government debt/GDP ratio, the exact opposite of what was expected and desired.
While the IMF might not prefer to use the term, what I have just described above is a ‘debt trap’. Beyond a certain point an economy has simply accumulated more debt than it can pay back without resort to currency devaluation. (In the event that a country has borrowed in a foreign currency, even devaluation won’t work and some form of restructuring or default will be required to liquidate the debt.)
The IMF is thus tacitly admitting that those economies in the euro-area struggling, and so far failing, to implement austerity are in debt traps. Austerity, as previously recommended by the IMF, is just not going to work. The question that naturally follows is, what will work?
Well, the IMF isn’t exactly sure. The paper does not draw such conclusions. But no matter. If austerity doesn’t work because the negative fiscal multiplier is larger than previously assumed, well then for now, just ease off austerity while policymakers consider other options. In other words, buy time. Kick the can. And hope that the bond markets don’t notice.
Now, nearly two years later, the IMF has been joined in its doubts by a chorus of economic officials and academics from all over the world increasingly concerned that their interventions are failing and, in some cases, putting forth proposals of what should be done.
Let’s start with the Bank of England. Arguably the most activist central bank post-2008, as measured by the expansion of its balance sheet, several members of the Banks’ Monetary Policy Committee have expressed concern about the risks to financial stability posed by soaring UK property prices, a lack of household savings and a financial sector that remains highly leveraged. In a recent speech, BoE Chief Economist Charlie Bean stated that:
[T]he experience of the past few years does appear to suggest that monetary policy ought to take greater account of financial stability concerns. Ahead of the crisis, Bill White and colleagues at the Bank for International Settlements consistently argued that when leverage was becoming excessive and/or asset prices misaligned, central bankers ought to ‘lean against the wind’ by keeping interest rates higher than necessary to meet the price stability objective in the short run. Just as central banks are willing to accept temporary deviations from their inflation targets to limit output volatility, so they should also be willing to accept temporary deviations to attenuate the credit cycle. Essentially it is worth accepting a little more volatility in output and inflation in the short run if one can thereby reduce the size or frequency of asset-price busts and credit crunches.
In other words, perhaps central bank policy should change focus from inflation targeting, which demonstrably failed to prevent 2008, and instead to focus on money and credit growth. This is clearly an anti-Kenyesian view in principle, although one wonders how it might actually work in practice. In closing, he offered these thoughts:
I opened my remarks tonight by observing that my time at the Bank has neatly fallen into two halves. Seven years of unparalleled macroeconomic stability have been followed by seven years characterised by financial instability and a deep recession. It was a salutary lesson for those, like me, who thought we had successfully cracked the problem of steering the economy, and highlighted the need to put in place an effective prudential framework to complement monetary policy. Policy making today consequently looks a much more complex problem than it did fourteen years ago.
Indeed. Policy making does look increasingly complex. And not only to the staff of the IMF and to Mr Bean, but also to the staff at the Bank for International Settlements, to which Mr Bean referred in his comments. In a recent speech, General Manager of the BIS, Jaime Caruana, taking a global view, expressed fresh concern that:
There is considerable evidence that, for the world as a whole, policy interest rates have been persistently below traditional benchmarks, fostering unbalanced expansions. Policy rates are comparatively low regardless of the benchmarks – be these trend growth rates or more refined ones that capture the influence of output and inflation… Moreover, there is clear evidence that US monetary policy helps explain these deviations, especially for small open and emerging market economies. This, together with the large accumulation of foreign exchange reserves, is consistent with the view that these countries find it hard, economically or politically, to operate with rates that are considerably higher than those in core advanced economies. And, alongside such low rates, several of these economies, including some large ones, have been exhibiting signs of a build-up of financial imbalances worryingly reminiscent of that observed in the economies that were later hit by the crisis. Importantly, some of the financial imbalances have been building up in current account surplus countries, such as China, which can ill afford to use traditional policies to boost domestic demand further. This is by no means new: historically, some of the most disruptive financial booms have occurred in current account surplus countries. The United States in the 1920s and Japan in the 1980s immediately spring to mind.
The above might not sound terribly controversial from a common-sense perspective but to those familiar with the core precepts of the neo-Keynesian mainstream, this borders on economic heresy. Mr Caruana is implying that the Great Depression was not caused primarily by the policy failures of the early 1930s but by the boom preceeding it and that the stagnation of Japan in recent decades also has its roots in an unsustainable investment boom. In both cases, these booms were the product of economic interventions in the form of inappropriately easy monetary policy. And whence does current inappropriate policy originate? Why, from the US Federal Reserve! Mr Caruana is placing the blame for the renewed, dangerous buildup of substantial global imbalances and associated asset bubbles specifically on the Fed!
Yet Mr Caruana doesn’t stop there. He concludes by noting that:
[T]he implication is that there has been too much emphasis since the crisis on stimulating demand and not enough on balance sheet repair and structural reforms to boost productivity. Looking forward, policy frameworks need to ensure that policies are more symmetrical over the financial cycle, so as to avoid the risks of entrenching instability and eventually running out of policy ammunition.
So now we have had the IMF observing that traditional policies aren’t working as expected; BoE Chief Economist Bean noting how policy-making has become ‘complex’; and BIS GM Caruana implying this is primarily due to the boom/bust policies of the US Federal Reserve. So what of the Fed itself? What have Fed officials had to say of late?
Arguably the most outspoken recent dissent of the policy mainstream from within the Fed is that from Jeffrey Lacker, President of the regional Richmond branch. In a recent speech, he voiced his clear opposition to growing central bank interventionism:
There are some who praise the Fed’s credit market interventions and advocate an expansive role for the Fed in promoting financial stability and mitigating financial system disruptions. They construe the founders of the Federal Reserve System as motivated by a broad desire to minimize and prevent financial panics, even beyond simply satisfying increased demand for currency. My own view, which I must note may not be shared by all my colleagues in the Federal Reserve System, favors a narrower and more restrained role, focused on the critical core function of managing the monetary liabilities of the central bank. Ambitious use of a central bank’s balance sheet to channel credit to particular economic sectors or entities threatens to entangle the central bank in distributional politics and place the bank’s independence at risk. Moreover, the use of central bank credit to rescue creditors boosts moral hazard and encourages vulnerability to financial shocks.
By explicitly referencing moral hazard, Mr Lacker is taking on the current leadership of the Federal Reserve, now headed by Janet Yellen, which denies that easy money policies have had anything to do with fostering financial instability. But as discussed earlier in this report, the historical evidence is clear that Fed activism is behind the escalating boom-bust cycles of recent decades. And as Mr Caruana further suggests, this has been a global phenomenon, with the Fed at the de facto helm of the international monetary system due to the dollar’s global reserve currency role.
EURO ‘MISSION ACCOMPLISHED’? UH, NO
As quoted at the start of this report, Jean-Claude Juncker, prominent Eurocrat and politician, recently claimed victory in the euro-crisis. “Greece and Europe won.” And who lost? Why, those who bet against them in the financial markets by selling their debt and other associated assets.
But is it really ‘mission accomplished’ in Europe? No, and not by a long shot. Yes, so-called ‘austerity’ was absolutely necessary. Finances in many EU countries were clearly on an unsustainable course. But other than to have bought time through lower borrowing costs, have EU or ECB officials actually achieved anything of note with respect to restoring economic competitiveness?
There is some evidence to this effect, for example in Ireland, Portugal and Spain, comprising some 15% of the euro-area economy. However, there is also evidence to the contrary, most clearly seen in France, comprising some 20% of the euro-area. So while those countries under the most pressure from the crisis have made perhaps some progress, the second-largest euro member country is slipping at an accelerating rate into the uncompetitive abyss. Italy, for many years a relative economic underperformer, is not necessarily doing worse than before, but it is hard to argue it is doing better. (Indeed, Italy’s recent decision to distort its GDP data by including estimates for non-taxable black-market activities smacks of a desperate campaign to trick investors into believing its public debt burden is more manageable than it really is.)
There is also a surge in economic nationalism throughout the EU, as demonstrated by the remarkable surge in support for anti-EU politicians and parties. It is thus far too early for Mr Juncker to claim victory, although politicians are naturally given to such rhetoric. The crisis of interventionism in the euro-area may is not dissipating; rather, it is crossing borders, where it will re-escalate before long.
THE SHORT HONEYMOON OF ‘ABENOMICS’
Turning to developments in Japan, so-called ‘Abenomics’, the unabashedly interventionist economic policy set implemented by Prime Minister Abe following his election in late 2012, has already resulted in tremendous disappointment. Yes, the yen plummeted in late 2012 and early 2013, something that supposedly would restore economic competitiveness. But something happened on the way, namely a surge in import prices, including energy. Now Japan is facing not just economic stagnation but rising inflation, a nasty cocktail of ‘stagflation’. Not that this should be any surprise: Devaluing your way to prosperity has never worked, regardless of when or where tried, yet doing so in the face of structural economic headwinds is guaranteed to produce rising price inflation, just as it did in the US and UK during the 1970s.
With reality now having arrived, it will be interesting to see what Mr Abe does next. Will he go ‘all-in’ with even more aggressive yen devaluation? Or will he consider focusing on structural reform instead? Although I am hardly a Japan expert, I have travelled to the country regularly since the late 1990s and my sense is that the country is likely to slip right back into the ‘muddle through’ that characterised the economy during most of the past decade. Of course, in the event that another major global financial crisis unfolds, as I regard as inevitable in some form, Japan will be unable to avoid it, highly integrated as it is.
THE BUCK STOPS HERE: A ‘BRIC’ WALL
In my book, THE GOLDEN REVOLUTION, I document how the BRIC economies (Brazil, Russia, India, China, now joined by South Africa to make the BRICS) have been working together for years to try and reorient themselves away from mercantilist, dollar-centric, export-led economic development, in favour of a more balanced approach. Certainly they have good reasons to do so, as I described in a 2012 report, THE BUCK STOPS HERE: A BRIC WALL:
[T]he BRICS are laying the appropriate groundwork for their own monetary system: Bilateral currency arrangements and their own IMF/World Bank. The latter could, in principle, form the basis for a common currency and monetary policy. At a minimum it will allow them to buy much global influence, by extending some portion of their massive cumulative savings to other aspiring developing economies or, intriguingly, to ‘advanced’ economies in need of a helping hand and willing to return the favour in some way.
In my new book, I posit the possibility that the BRICS, amid growing global monetary instability, might choose to back their currencies with gold. While that might seem far-fetched to some, consider that, were the BRICS to reduce their dependence on the dollar without sufficient domestic currency credibility, they would merely replace one source of instability with another. Gold provides a tried, tested, off-the-shelf solution for any country or group of countries seeking greater monetary credibility and the implied stability it provides.
Now consider the foreign policy angle: The Delhi Declaration makes clear that the BRICS are not at all pleased with the new wave of interventionism in Syria and Iran. While the BRICS may be unable to pose an effective military opposition to combined US and NATO military power in either of those two countries, they could nevertheless make it much more difficult for the US and NATO to finance themselves going forward. To challenge the dollar is to challenge the Fed to raise interest rates in response. If the Fed refuses to raise rates, the dollar will plummet. If the Fed does raise interest rates, it will choke off growth and tax revenue. In either case, the US will find it suddenly much more expensive, perhaps prohibitively so, to carry out further military adventures in the Middle East or elsewhere.
While the ongoing US confrontations with Iran and Syria have been of concern to the BRICS for some time, of acute concern to member Russia of late has been the escalating crisis in Ukraine. The recent ‘Maidan’ coup, clearly supported by the US and possibly some EU countries, is regarded with grave concern by Russia, which has already taken action to protect its naval base and other military assets in the Crimea. Now several other Russian-majority Ukrainian regions are seeking either autonomy or independence. The street fighting has been intense at times. The election this past weekend confirming what Russia regards as an illegitimate, NATO-puppet government changes and solves nothing; it merely renders the dipute more intractable and a further escalation appears likely. (Russia is pressing Kiev as I write to allow it to begin providing humanitarian assistance to the rebellious regions, something likely to be denied.)
US economic sanctions on Russia have no doubt helped to catalyse the most recent BRICS initiative, in this case one specific to Russia and China, who have agreed a landmark 30-year gas deal while, at the same time, preparing the groundwork for the Russian banking system to handle non-dollar (eg yuan) payments for Russian gas exports. This is a specific but nevertheless essential step towards a more general de-dollarisation of intra-BRICS trade, which continues to grow rapidly.
The dollar’s international role had been in slow but steady decline for years, with 2008 serving to accelerate the process. The BRICS are now increasingly pro-active in reducing their dollar dependence. Russia has been dumping US dollar reserves all year and China is no longer accumulating them. India has recently eased restrictions on gold imports, something that is likely to reduce Indian demand for US Treasuries. (Strangely enough, and fodder for conspiracy theorists, tiny Belgium has stepped in to fill the gap, purchasing huge amounts of US Treasuries in recent months, equivalent to some $20,000 per household! Clearly that is not actually Belgian buying at all, but custodial buying on behalf of someone else. But on behalf of whom? And why?)
As I wrote in my book, amid global economic weakness, the so-called ‘currency wars’ naturally escalate. Competitive devaluations thus have continued periodically, such as the Abenomics yen devaluation of 2012-13 and the more recent devaluation of the Chinese yuan. As I have warned in previous reports, however, history strongly suggests that protracted currency wars lead to trade wars, which can be potentially disastrous in their effects, including on corporate profits and valuations.
THE END OF GLOBALISATION?
Trade wars are rarely labelled as such, at least not at first. Some other reason is normally given for erecting trade barriers. A popular such reason in recent decades has been either environmental or health concerns. For example, the EU and China, among other countries, have banned the import of certain genetically modified foods and seeds.
Rather than erect formal barriers, governments can also seek ways to subsidise domestic producers or exporters. While the World Trade Organisation (WTO) aims to prevent and police such barriers and subsidies, in practice it can take it years to effectively enforce such actions.
Well, there is now a new excuse for trade barriers, one specific to the huge global tech and telecommunications industry: Espionage. As it emerges that US-built and patented devices in widespread use around the world contain various types of ‘backdoors’ allowing the US National Security Agency to eavesdrop, countries are evaluating whether they should ban their use. Cisco’s CEO recently complained of losing market share to rivals due to such concerns. Somewhat ominously, China announced over the past week that it would prohibit public entities from using Microsoft Windows version 8 and would require banks to migrate away from IBM computer servers.
There has also been talk amongst the BRICS that they should build a parallel internet infrastructure to avoid routing information via the US, where it is now assumed to be automatically and systematically compromised. Given these concerns, it is possible that a general tech trade war is now breaking out under an espionage pretext. What a convenient excuse for protecting jobs: Protecting secrets! What do you think the WTO will have to say about that?
Imagine what a tech trade war would do to corporate profits. Name one major tech firm that does not have widely dispersed global supply chains, manufacturing operations and an international customer base. Amid rising trade barriers, tech firms will struggle to keep costs down. Beyond a certain point they will need to pass rising costs on to their customers. The general deflation of tech in recent decades will go into reverse. Imagine what that will do to consumer price inflation around the world.
Yes, a tech trade war would be devastating. Household, ‘blue-chip’ tech names might struggle to survive, much less remain highly profitable. And the surge in price inflation may limit the ability of central banks to continue with ultra-loose monetary policies, to the detriment also of non-tech corporate profits and financial health. This could lead into a vicious circle of reactionary protectionism in other industries, a historical echo of the ‘tit-for-tat’ trade wars of the 1930s that were part and parcel of what made the Great Depression such a disaster.
Given these facts, it is difficult to imagine that the outbreak of a global tech trade war would not result in a major equity market crash. Current valuations are high in a historical comparison and imply continued high profitability. Major stock markets, including the US, could easily lose half their value, even more if a general price inflation led central banks to tighten monetary conditions by more than financial markets currently expect. Of all the ‘black swans’ out there, a tech trade war is not only taking flight; it is also potentially one of the largest, short of a shooting war.
A SILVER LINING TO THE GLOOM AND DOOM
With equity valuations stretched and complacency rampant—the VIX volatility index dipped below 12 this week, a rare event indeed—now is the time to proceed with extreme caution. The possible outbreak of a tech trade war only adds to the danger. Buying the VIX (say, via an ETF) is perhaps the most straightforward way to insure an equity portfolio, but there are various ways to get defensive, as I discussed in my last report.
Where there is risk, however, there is opportunity, and right now there is a silver lining: With a couple of exceptions, metals prices are extremely depressed relative to stock market valuations. Arguably the most depressed is silver. Having slipped below $20/oz, silver has given up all of its previous, relative outperformance vs other metals from 2010-11. It thus appears cheap vs both precious and industrial metals, with silver being something of a hybrid between the two. Marginal production capacity that was brought on line following the 2010-11 price surge is now uneconomic and is shutting down. But the long slide in prices has now attracted considerable speculative short interest. If for any reason silver finds a reason to recover, the move is likely to be highly asymmetric.
Investors seeing an opportunity in silver can, of course, buy silver mining shares, either individually or through an ETF. A more aggressive play would be to combine a defensive equity market stance—say buying the VIX—with a long position in the miners or in the metal itself. My view is that such a position is likely to perform well in the coming months. (Please note that volatility of the silver price is normally roughly double that of the S&P500 index, so a market-neutral, non-directional spread trade would require shorting roughly twice as much of the S&P500 as the purchasing of silver. Also note, however, that correlations are unstable and thus must be dynamically risk-managed.)
As famed distressed-debt investor Howard Marks says, investing is about capturing asymmetry. Here at Amphora we aim to do precisely that. At present, there appears no better way to go about it than to buy silver, either outright or combined with a stock market short/underweight. From the current starting point, this could well be one of the biggest trades of 2014.
[Editor's Note: this first appeared on mises.org]
Last week marked the 100 Anniversary of the beginning of World War I. That war, which produced over 37 million casualties, not counting the related famines and epidemics that came in the war’s wake, also destroyed the political systems of numerous countries, setting the stage for fascism and communism in Europe. In the United States, and of course also throughout Europe, the war led to paranoia and political repression rarely seen during the previous century, and in the United States, the Wilson administration’s “anti-sedition” efforts led to a large-scale destruction of basic American liberties unmatched even by the Alien and Sedition acts of the eighteenth century.
For Americans especially, the war and the more than 100,000 American war dead gained nothing more than a post-war depression. While some Europeans could at least claim to be fighting against physical invasion, the Americans fought for nothing except to defend some authoritarian regimes from some other authoritarian regimes. The idea that the war had something to do with “democracy” was obviously untrue even at the time, and in retrospect, the claim is all the more ridiculous given the rise of totalitarianism, which was fostered by the Treaty of Versailles.
The deadly effects of the war, the repressive measures enacted by supposedly enlightened regimes, and how the war paved the way for its even bloodier sequel twenty-five years later, have been covered by a number of excellent historians and economists, including Ralph Raico, Robert Higgs, Hunt Tooley, and Murray Rothbard. The war led to revolutions in ideology, public administration, government, and war itself. Few of these changes improved the lives of ordinary people, and most of these changes led to the commodification and cheapening of human life and human freedom.
The revolutionary nature of the war is little disputed today, but rather than focus on the war itself or its aftermath, it may also be helpful to consider what the war relegated to the dustbin of history.
The Economics of the Bourgeois Century
What some historians now call “the bourgeois century” was the ninety-nine years between the Napoleonic Wars and the beginning of the First World War. From 1815 to 1914, there was no major war in Europe and the standard of living increased far beyond anything ever witnessed before as industrialization, mechanization, and the resulting increases in worker productivity spread throughout the continent.
During the middle of the century, free trade became more widespread than ever, with labor and capital enjoying never-before-seen freedom to move across national borders. Throughout much of central and western Europe, no passport was necessary to move between nation states. Indeed, passports and border checkpoints became associated with despotic and backward countries like Russia.
It was during this period that we saw the rise of the Cobdenites (also known as the Manchester liberals) in Britain who, beginning with the Anti-Corn Law League, slowly rolled back the mercantilist rule of the landed nobility who opposed free trade. The rise of the middle classes both economically and politically were buttressed by mass movements of classical liberalism Europe-wide that demanded greater economic freedoms for themselves and fewer tax-funded privileges for the ruling classes.
As free trade spread, and lessened the advantages of controlling foreign colonies, imperialism receded as well, and an international peace movement arose with John Cobden, dubbed “the international man” as one of its celebrities.
At the same time, many luxuries became available to the middle classes, and this was a time when much of what we now take for granted was quite novel. It was during this time that something that might be recognized as “the weekend” became known. For most people it was still just a one-day affair (Sunday), but it was the first time in human history that average people had the ability to not only stop work for a few hours, but to actually spend some money on recreation such as a short trip to the seaside, or shopping, organized sports, or a trip to a museum, play, or other cultural event.
The new economic realities led to major changes in families as well. For the first time, a large number of parents could afford to formally educate their children in schools or with books. More leisure and income also meant that parents could give children individual attention, play games in the home, read books as a family and more. Fewer and fewer children needed to work to help the family maintain a subsistence living. With the economic liberation of children also came much better conditions for women who became far better educated, and became valued for their ability to manage complex tasks such as the education of children, household hygiene (no small matter in a nineteenth century city) twice-a-day food shopping and more. Moreover, men and women began to engage in the odd practice of marrying for reasons of “sentiment and physical attraction” as marrying for financial reasons became less a matter of life and death. Just as leisure on Sundays allowed for more public recreation, leisure time within the family allowed for more “private” recreation as well, which was complimented by marriage manuals, such as those found in France, that reminded men to tend to women’s sexual needs.
The Rise of Imperialism and the Road to World War I
Naturally, sex, family, and an afternoon at the beach struck many conservative politicians and “deep thinkers” as frivolous wastes of time. Family time and leisure was wasted on mere ordinary people when far more “honorable” pursuits such as nation-building, colonial adventurism, and the art of war were being neglected.
Certainly Otto von Bismarck, a great enemy of the liberals, was expressing contempt for such domestic pursuits when he declared his disdain for the Manchester liberals as “Manchester moneybags” who were concerned not with the glory of the nation-state, but with making money.
By the late nineteenth century, bourgeois liberalism was in decline. Assaulted on one side by the Marxists and other socialists, and on the other side by conservatives, nationalists, and imperialists, the great powers of Europe began to sink back into mercantilism, nationalism, and imperialism. The Scramble for Africa was representative of the new imperialism as the European great powers looked ever more aggressively for new colonies. Meanwhile, the British tightened their grip on India while inventing the concentration camp in its efforts to starve the Boers into submission.
In the late nineteenth century, Bismarck was hard at work inventing the welfare state and hammering together Germany into one unified nation-state. By the turn of the century, one of the few remaining liberals, Vilfredo Pareto in Italy, was able to declare that socialism had finally triumphed in Europe.
In the decade before the First World War, The generation of European liberals such as Gustav de Molinari, Cobden, John Bright, Herbert Spencer, Eugen Richter, and others were dead or near death. There were few young, new liberal scholars to replace them.
At the same time, trade barriers abound throughout Europe as the great powers turned to the economics of imperialism characterized by mercantilism, tariffs, border controls, regulation, and militarism.
Europe during the bourgeois century was certainly no utopia. The new cities were filled with disease, pollution, and crime. Medical science had yet to achieve what it would in the twentieth century, and of course, standards of living remained low when compared to today. But even if we consider these problems, which plague many societies even today, the enormous gains made for ordinary people, thanks to industrialization and the rise of free trade, were fostered all the more by the rise of classical liberalism which actively sought to avoid war, political repression, and economic intervention as the means to a more prosperous society.
Indeed, historian Daniel Yergin would come to refer to this period as the time of “the first era of globalization” and to note that “the world economy experienced an era of peace and growth that, in the aftermath of the carnage of World War I, came to be remembered as a golden age.”
Liberalism was already deeply in decline by 1914, but the First World War was perhaps the final nail in the coffin. Following the war, depression followed, and for Europe, this was followed by hyperinflation in many places, political instability, a declining standard of living — and finally — fascism, communism, and war. In the United States, which managed to avoid most of the destruction of the war, prosperity was achieved during the 1920s, only to be lost and followed by fifteen years of depression and war.
One hundred years after the beginning of the end for bourgeois Europe, we are fortunate to be looking on a new classical liberalism, now known as libertarianism, which is not in decline, but instead is making great strides globally in the face of a still-ascendant ideology of interventionism, mercantilism, and war. We can hope that a third world war will not bring it all crashing down.
Matt Ridley, in The Times [paywall restricted], considers the political relevance of the values of 19th century Liberals, including Richard Cobden.
Surely wanting government to stay out of the economy should go with wanting government to stay out of society too. They went together in the 19th century, after all. Radical liberals who campaigned against war, colonialism, slavery, politicial patronage and the established church were usually furiously free-market libertarians on economics: people such as Richard Cobden, Harriet Martineau, Herbert Spencer or WE Gladstone.
Cobden, said one of his biographers, “believed in individual liberty and enterprise, in free markets, freedom of opinion and freedom of trade.” But he also was an implacable pacifist and refused a barontcy from a monarch he disapproved of. Nobody would have dreamed of calling him a rightwinger.
Mr Ridley also suggests that these values would be useful for politicians to build a coalition around: people who want the government out of “the boardroom and the bedroom.” That is not a cause that the Cobden Centre has any business getting involved in. But it is nice to see someone noticing the relevance of Cobden’s ideas.
According to commentators, sanctions imposed by the US and the European Union are pushing Russia towards a recession. However, we hold that some key Russian economic data have been displaying weakening prior to the annexation of Crimea to Russia. This raises the likelihood that sanctions might not be the key factor for an emerging recession.
The yearly rate of growth of monthly real gross domestic product (GDP) eased to 0.3% in February from 0.7% in January and 1.8% in July last year. After closing at 12.2% in March last year the yearly rate of growth of retail sales fell to 7.7% in January before settling at 9.6% in February.
We suggest that the key factor behind any emerging slowdown and a possible recession is a sharp decline in the yearly` rate of growth of money supply (AMS) from 67.1% in May 2005 to minus 12.2% by September 2009. We hold that the driving force behind this sharp decline is a strong decline in the growth momentum of the central bank’s balance sheet during that period (see chart).
There is a long time lag from changes in money supply and its effect on economic activity. We suspect that it is quite likely that the effect from a fall in the growth momentum of money during May 2005 to September 2009 is starting to dominate the present economic scene.
This means that various bubble activities that emerged on the back of the prior strong increase in money supply are at present coming under pressure. So from this perspective irrespective of sanctions, the Russian economy would have experienced a so-called economic slowdown, or even worse a recession.
Now, to counter a further weakening in the ruble against the US$ the Russian central bank has raised the seven day repo rate by 1.5% to 7%. The price of the US$ in ruble terms rose to 36.3 in March from 30.8 rubles in March last year – an increase of 18%.
Whilst a tighter interest rate stance can have an effect on the present growth momentum of money supply this is likely to have a minor effect on the emerging economic slowdown, which we suggest is predominately driven by past money supply.
There is no doubt that if sanctions were to become effective they are going to hurt economic activity in general i.e. both bubble and non-bubble activities.
On this one needs to exercise some caution given the possibility that major world economies are heading toward a slower growth phase.
Hence from this perspective, regardless of sanctions the pace of the demand for the Russian exports is likely to ease.
We hold that it is quite likely that the Euro-zone, an important Russian trading partner, is unlikely to enforce sanctions in order to cushion the effect of the possible emerging economic slowdown in the Euro-zone. (Sanctions are likely to have a disruptive economic effect not only on Russia but also on the Euro-zone). Observe that Russia’s export to the Euro-zone as a percentage of its total exports stood at 54.1% in 2013 against 52.9% in 2012. In contrast Russia’s export to the US as a % of total stood at 2.1% in 2013. As a percentage of total imports Euro-zone imports from Russia stood at 8% in January whilst American imports from Russia as a percentage of total imports stood at 0.8%. Note that the Euro-zone relies on Russia for a third of its energy imports. Hence it will not surprise us if the Europeans are likely to be more reluctant than the US in enforcing sanctions.
Russia’s foreign reserves have weakened slightly in February from the month before. The level of reserves fell by 1.1% to $493 billion after declining by 2.1% in January. The growth momentum of reserves also remains under pressure. Year-on-year the rate of growth stood at minus 6.2% in February against a similar figure in January. A possible further weakening in China’s economic activity and ensuing pressure on the price of oil is likely to exert more pressure on foreign reserves.
Meanwhile, the growth momentum of the Russian consumer price index (CPI) displays a visible softening. The yearly rate of growth stood at 6.2% in February against 6.1% in January. Observe that in February last year the yearly rate of growth stood at 7.3%. Based on the lagged growth momentum of our Russian monetary measure AMS we can suggest that the yearly rate of growth of the Russian CPI is likely to weaken further in the months ahead.
Summary and conclusion
According to some experts sanctions imposed by the US and the European Union are likely to push Russia into a recession. We suggest that the key factor which is likely to push Russia into a recession is not sanctions as such but a sharp decline in the growth momentum of money supply between May 2005 and September 2009. Given the possibility that major world economies are heading towards a renewed economic slowdown, we suggest that regardless of sanctions the pace of the demand for Russia’s exports is likely to ease. Now, given that the Euro-zone relies on Russia for a third of its energy imports it will not surprise us if the Euro-zone proves likely to be more reluctant than the US in enforcing sanctions.
Richard Cobden was renowned for his role in the Anti-Corn Law League, campaigning against import tariffs. He was also a champion of the idea that peace would be strengthened by more individual business contacts across national borders.
I think it’s fair to say that Cobden would support the European Commission’s plan to scrap trade barriers between the European Union and the Ukraine announced last week. The Ukraine is not threatening war against any European Union countries and such boost to trade as will happen between now and September would tend to help peace and democracy in the region.
But surely it would be counter-productive to re-introduce barriers to trade with the Ukraine when the six months are up? And couldn’t similar arrangements be offered to Russia if its government decided to stop its own mercantile approach?
With his thoughtful restructuring of America’s military, secretary of defense Chuck Hagel — a Republican — has cemented Obama’s signature legacy: restoring America to a peacetime footing. Obama’s bringing American troops home from two wars, and, now, reducing the military to a strong, but proportionate, peacetime footing, was not easy.
Doing so required something of a political miracle. Obama, with a critical assist from Hagel, is pulling it off.
This columnist has critiqued many of Obama’s initiatives. The president’s follies in other areas detract from but do not diminish his real achievement here.
Bringing about peace is remarkable, historic, and transformational. Future historians almost certainly will scratch their heads as to how Obama’s own White House wrapped the boss’s prestige around Obamacare, a botch, rather putting to the fore the president’s greatest achievement.
An aside. Current events in Crimea are unlikely to destroy Obama’s achievement. While Kiev, understandably, and the West express alarm … what’s happening now in Ukraine presents more as chess rather than hand grenades. Putin is an autocrat (and geopolitical chess grandmaster), yet no brutal tyrant in the Stalin mode. Russian military intervention in Crimea appears based on securing a fundamental Russian asset — its sole warm water port — and protection of ethnic Russians living there.
President Reagan’s stated reason for invading Grenada (and deposing the government there, something Putin studiedly has not shown signs of attempting in Ukraine) was to protect 800 American medical students. Putin is not neo-imperialist. This predicament is likely to end with a Russian-led bailout of an insolvent Ukraine. The severe difficulties in Ukraine shall pass without reigniting the Cold War.
Meanwhile, over two years ago, Obama astutely observed, in a speech before the United Nations General Assembly, that “the tide of war is receding. … Moreover we are poised to end these wars from a position of strength.”
The world’s prevailing geopolitical winds truly, now, are winds of peace, not war. (This columnist originally missed Obama’s relevance to the process, for which he duly hereby issues a correction.) Obama promised to align America with the winds of peace in ways that his rivals for office simply did not. The electorate wants peace. Obama alone caught the political wave of peace. He rode it to election … and re-election. In great measure Obama is fulfilling his commitment to peace.
As shrewdly noted by columnist Adil E. Shamoo in consortiumnews.com,
If a Republican were president — say Sen. John McCain, who lost to Obama in 2008, or Mitt Romney, who failed to unseat him in 2012 — he would have found a way to keep as many as 30,000 American combat troops in Iraq, making Iraq a violent client state rather than the distant disaster it is today. Troops would continue coming home in coffins, and Iraq would feel the wrath of continued air strikes and raids.
If Hillary Clinton had won the primary in 2008 and became president, she would have rallied to keep combat troops in Iraq, too….
If a Republican or Ms. Clinton were president, American troops would still be in Afghanistan ….
Secretary of defense Chuck Hagel’s plan declared on February 24th to reduce the military budget to the lowest level since before World War II seals Obama’s real legacy. For Hagel to have done this in a way that enjoys a broad-based, at least tacitly bipartisan, recognition — that the restructuring will not undermine American security — is an impressive achievement.
At Obama’s bidding, Hagel’s judicious slimming down, restructuring, and modernizing of America’s force structure, together with Obama’s winding down the presence of American troops in Iraq and Afghanistan, is an impressive, historic, legacy. The emergence of peace was foreshadowed by the 2009 award to the newly fledged President Obama of the Nobel Peace Prize. He has delivered, impressively.
Obama’s successful confrontation with, and victory over, the Military-Industrial complex is striking. Peace is in the sweet spot of American, and world, priorities.
Peace, not the benighted Obamacare, is Obama’s signature initiative. Continuing to defend, and even feature, the botched Obamacare likely will cost the Democrats control of the US Senate this year.
Meanwhile, virtually unadvertised, Obama is making good on his promise of ushering in a wave, and likely an era, of peace This columnist is a Tea Party Patriot, right wing conspirator, Republican Party loyalist, and Obama opponent. It is with some trepidation, therefore, that he points out something that, if noticed by the Democrats, might be used to avert the onrushing Democratic Party rout. (The captains of the Other Team reportedly do not routinely read here — their loss — so making this observation is not a reckless act.)
Hagel’s speech cements President Obama’s legacy. Hagel:
Our force structure and modernization recommendations are rooted in three realities:
- First, after Iraq and Afghanistan, we are no longer sizing the military to conduct long and large stability operations;
- Second, we must maintain our technological edge over potential adversaries;
- Third, the military must be ready and capable to respond quickly to all contingencies and decisively defeat any opponent should deterrence fail.
Accordingly, our recommendations favor a smaller and more capable force – putting a premium on rapidly deployable, self-sustaining platforms that can defeat more technologically advanced adversaries.
The forces we prioritized can project power over great distances and carry out a variety of missions more relevant to the President’s defense strategy, such as homeland defense, strategic deterrence, building partnership capacity, and defeating asymmetric threats. …
Our recommendations seek to protect capabilities uniquely suited to the most likely missions of the future, most notably special operations forces used for counterterrorism and crisis response. Accordingly, our special operations forces will grow to 69,700 personnel from roughly 66,000 today.
Thus has the Republican Secretary Chuck Hagel cemented the Democratic President Obama’s legacy. Both thereby make a great contribution to America’s well being and, likely, to history. Guiding America home to, or at least toward, a peacetime footing — not Obamacare — is Obama’s signature achievement. It is one that deserves recognition from conservatives and libertarians as well as progressives … and from all Americans.
This article was previously published at Forbes.com.
Click for scan
The 1928 Kellogg–Briand Pact, officially the General Treaty for Renunciation of War as an Instrument of National Policy, is a simple read. It’s so simple that its three short articles are easy to miss in the text of the Treaty.
These are the two substantial articles (the third deals with ratification):
The High Contracting Parties solemly declare in the names of their respective peoples that they condemn recourse to war for the solution of international controversies, and renounce it, as an instrument of national policy in their relations with one another.
The High Contracting Parties agree that the settlement or solution of all disputes or conflicts of whatever nature or of whatever origin they may be, which may arise among them, shall never be sought except by pacific means.
The fact of the Second World War proves the Treaty’s failure in practice but I was grateful to the Attorney General’s department for confirming in an answer to a recent Parliamentary question that it remains in force:
Conflict Prevention: Treaties
Steve Baker: To ask the Attorney-General if he will make an assessment of whether the General Treaty for Renunciation of War as an Instrument of National Policy remains binding on the UK.
The Solicitor-General: I am advised by the Foreign and Commonwealth Office that the General Treaty for the Renunciation of War as an Instrument of National Policy (also known as the Kellogg-Briand Pact) remains in force and that the United Kingdom remains a party.
Perhaps the brevity, simplicity and directness of the Treaty and its historic failure explain why certain statesmen continue to believe in war as an instrument of policy, with or without the support of the United Nations. The US State Department comments:
The first major test of the pact came just a few years later in 1931, when the Mukden Incident led to the Japanese invasion of Manchuria. Though Japan had signed the pact, the combination of the worldwide depression and a limited desire to go to war to preserve China prevented the League of Nations or the United States from taking any action to enforce it. Further threats to the Peace Agreement also came from fellow signatories Germany, Austria and Italy. It soon became clear that there was no way to enforce the pact or sanction those who broke it; it also never fully defined what constituted “self-defense,” so there were many ways around its terms. In the end, the Kellogg-Briand Pact did little to prevent World War II or any of the conflicts that followed. Its legacy remains as a statement of the idealism expressed by advocates for peace in the interwar period. Frank Kellogg earned the Nobel Peace Prize in 1929 for his work on the Peace Pact.
Idealistic the Treaty may be but the British Government just confirmed in the season of goodwill that it remains in force and the UK remains a party.
The spirit of it is simple enough: the UK may not engage in acts of aggression under any circumstances. I hope this straightforward lesson in international law will become widely known.
An article by Cobden Centre fellow David Howden for Mises.ca.
Today many of us are wearing a poppy on our lapels in a show of remembrance. What exactly are we remembering?
The Great War from 1914-18 saw many changes to the world. Many of them were bad, though as we shall see some good did come from one of, if not the worst war of all time.
Over 64,000 Canadians lost their lives fighting in Europe, almost 1% of her population. A further 150,000 were injured. The comparable statistics today, updated for population growth, would be nearly 315,000 dead soldiers and almost 700,000 wounded. Remember that these are just Canadian soldiers. The final global death toll was 17 million (including the civilian deaths in the neutral countries of Scandinavia) and over 21 million wounded.
In fact, in this regard one could argue that Canadians came away relatively unscathed. Romania lost 10% of its population, Serbia 16%, and the great Ottoman Empire almost 14%. This latter figure excludes the additional 100,000 Turks who died fighting the subsequent Turkish War of Independence following the signing of the Armistice in 1918.
The First World War was not only the first war to be waged on a truly global scale, it was the first to inflict the magnitude of destruction it did. Soldiers of previous battles were felled by disease more often than in direct combat. Advances in technology changed that, and even though the 1918 outbreak of Spanish influenza killed many more (current estimates place the deaths from the flu at 50-100 million), the Great War killed more people in four short years than most of the previous European wars combined.
In remembering the Great War it is easy to focus on the deaths of those who sacrificed their lives, but it is also important to reflect on what caused the War and what it achieved.
It’s true that advances in modern warfare and logistics made the War able to be fought on a wider scale than ever before. It is also true that a series of alliances – both formal and informal – agreed upon prior to the War brought belligerents into the melee with only tangential interest in it. Canada’s allegiance to Great Britain at the time might be thought of in this way, as could any number of the other Dominions and Colonies including Australia, India, New Zealand and Newfoundland.
Some simple economics also played an important role. Prior to the War most countries of the world had a monetary system linked to the gold standard. Government deficit spending was curtailed under this system as borrowing would be limited by the extent of a country’s gold reserves. The expression “to have a war chest” has its origins in the necessity of a sovereign to carry a chest of gold to war to pay soldiers. Wars under the gold standard were quite limited affairs, curtailed by the supply of gold available to keep soldiers paid (and motivated).
The War brought with it the breakdown of the gold standard as all belligerents resorted to monetary inflation to finance the growing expenses. This one simple fact goes far in explaining why the scope of the War and the resources driven into it were so great. The lack of a spending anchor under a fiat money regime allowed countries to print money and run deficits in order to finance the increasingly expensive battles, expensive both in money and lives. While governments could print money to paper over the cost of the War, soldiers were much less reproducible. As we shall see, the use of conscription was the counterpart to inflation and allowed the War to continue being waged once volunteers ran out.
The Great War was supposed to be the war to end all wars. Unfortunately the signing of the Treaty of Versailles to officially settle it proved to be the peace to end all peace.
A not well-known 36-year old economist by the name of John Maynard Keynes found fame penning his The Economic Consequences of the Peace in 1919. Keynes had two profound criticisms of the Treaty. First, that Europe could not survive and prosper without an integrated economic system, something that the Treaty precluded. Second, that the Treaty violated many terms of the Armistice signed 95 years ago on the eleventh hour of the eleventh day of the eleventh month of 1918. The armistice included terms relating to war reparations, territorial adjustments and general even-handedness in economic matters.
Keynes presciently predicted that the Treaty of Versailles would be the cause of a future war, and 20 years later he was proven correct. Poor economic conditions in Germany as a result of war reparations and the loss of culturally and economically important territories set in motion a series of events that brought Adolph Hitler to power and resulted in the invasion of Poland by both Fascist Germany and Communist Russia in September 1939.
Six years and 50-85 million additional deaths later the world had a new Great War. This one necessitated a numbering system to distinguish the first Great War from the Second.
All of this death and destruction could easily be pegged on one person. The Bosnian Serb student Gavrilo Princip may have fired the shot that killed the heir to the Austo-Hungarian throne, the young Archduke Franz Ferdinand of Austria on June 28th, 1914. But Princip was not alone in his distaste for the ruling class of that Empire.
Indeed, general unease concerning many sovereigns and governance structures were warming like kindling, ready to ignite Europe at any time. Secession problems in the Austro-Hungarian Empire and brewing revolutions in both the Russian and Ottoman Empires were slowly creating the conditions for civil wars.
The British Empire under the rule of King George V was also going through its own coming of age problems, though nothing severe enough to spark bloody revolution. Indeed, the Great War ushered in an era that saw Britain’s Colonies and Dominions reorganise into a peaceful and voluntary structure. In few places was this push more apparent than in Canada.
A bloody Battle of the Somme resulted in Prime Minster Robert Borden’s pledge to send 500,000 soldiers to Europe by the end of 1916, despite a population in Canada of only 8 million at the time. Conscription was enacted to offset the dwindling supply of volunteers to join the War cause.
Almost all French Canadians opposed conscription, feeling no allegiance or duty to aid either England or France. The Conscription Crisis of 1917 was primarily a backlash of Francophone Canadians against the forced military service imposed by Ottawa to aid his Majesty’s war. Uneasiness about being Catholic soldiers under predominantly Protestant commanding officers also fuelled the flames.
The Conscription Crisis exposed Ottawa to many difficult questions. One problem was that by forcing labour, the Canadian government had no knowledge who would be the best soldier, toolmaker or farmer. Someone had to stay back and supply those who went to fight, but the government lacked any rational way to make this decision. More importantly, there was the apparent rights issue. Canada had never before enacted conscription, and the idea of forcing someone to fight in a war against their wishes is morally repugnant. More to the point, fighting a war in a distant land to aid a government which one never voted for created its own problems. The problem lives on today for pacifists around the globe, as well as those who choose to refrain from political participation.
Indeed, in a bid to garner support for conscription the Military Service Act of January 1st 1918 included exemptions to remove oneself from the forced call of duty. By autumn of that year these exemptions were removed, in a move that offended not only the French but also English-speaking Canadians. This move by Robert Borden not only shut the Conservative Party out of Quebec for over 50 years, but also caused them to lose the next general election in 1921 to the Liberal’s of William Lyon Mackenzie King.
At the very least, the Conscription Crisis put in motion a debate as to what role and duty, if any, the Dominions and their citizens had in regards to the United Kingdom. The culmination of these debates was the Statute of Westminster, signed into law by the Parliament of the United Kingdom in 1931 and passed on to all realms within the Commonwealth for ratification shortly thereafter. Amongst other things, the Statute legislated equality and self-governance for the Dominions that ratified it. (Not all colonies did so: Newfoundland Colony did not ratify the Statute, and remained a Dominion of the British Empire until joining Canada in 1949.)
The Commonwealth of Nations today survives as an organisation of 53 countries, most of which were territories of the British Empire. It represents a quarter of the world’s land mass, almost a third of its population and 15% of the globe’s GDP. It is a voluntary group which exists due to some loosely shared values paired with some established statutes.
Racial equality is a requirement for inclusion, and this was tested with the withdrawal of South Africa under apartheid, as well as its eventual readmission after its end. Not all member states recognise the Queen as the head of State, though some (like Canada) do. We have a shared history, heritage and traditions (like wearing a poppy on Remembrance Day). Chief among these is obedience to the common law, one of the greatest forces of civilisation in history. A dedication to peace, liberty and free trade are all points for inclusion, secured by the values of the 1971 Singapore Declaration.
There are no formal laws dictating that member countries must trade or associate with one another, but they do. The voluntary nature of this institution is apparent in the immigrants that flow between Commonwealth nations as well as the fact that Commonwealth members trade up to 50% more with other Commonwealth members than with non-members.
Inclusion in the Commonwealth does not yet instil by law the free movement of goods, people or money across borders, but it would be wise to do so. Some countries give preferential treatment to immigrants or investors from other Commonwealth countries, and the benefits are clear. Economic prosperity reigns when people, goods and money go to where they are treated best. Informal preferences within the Commonwealth promote this.
There is discussion of making the Commonwealth into a broader free trade union, as is the case with the European Union. This should be welcomed as it would solidify into law those benefits which heretofore are only informally recognised.
A word of caution is in order. Should the Commonwealth choose to formalise its union it must do so in its own way and according to its founding principles. Liberty and freedom are among these, and the voluntary nature of the union must also be upheld. (This in distinction to the mandatory nature of the European Union which now results in ill feelings of coercion or otherwise being forced to behave in ways undesired by many citizens of the member states.) Infringements to freedom and liberty, such as those occurring in South Africa under apartheid must be met swiftly and surely with exclusion from the union.
United we stand, but only if you want. Countries can choose to break the rules that have promoted peace and prosperity for so long, but must do so of their own accord and separately of Commonwealth benefits.
There is historical precedent for this. South Africa was forced to withdraw from the Commonwealth in 1961 under growing opposition from other members to legislated discrimination based on race. The Commonwealth reopened its arms at the fall of apartheid, and South Africa was readmitted in 1994 (less than one year after the fall of apartheid). More recently Zimbabwe was suspended for its human rights violations, ignoring the rule of law and suspension of its constitution, and the country’s government decided to formally withdraw in 2003.
Zimbabwe – when your government gets its act together and restores the conditions for peace and prosperity so cherished by the rest of us we will be waiting with open arms.
The Commonwealth has no positive obligation to set straight those countries that pursue different policies than us; who are we to decide? But not playing by our rules will not be tolerated and will be costly for belligerent countries. This is established by the final article of the Singapore Declaration, which states:
These relationships we intend to foster and extend, for we believe that our multi-national association can expand human understanding and understanding among nations, assist in the elimination of discrimination based on differences of race, colour or creed, maintain and strengthen personal liberty, contribute to the enrichment of life for all, and provide a powerful influence for peace among nations.
Coercion is rejected as a policy tool to enforce these values. Even though the Millbrook Commonwealth Action Programme does set out that Commonwealth Nations must concern themselves with other members’ internal situations, it limits repercussions to sanctions, suspensions and expulsions from the group as punishments for persistent violations to its core values.
The continued voluntary nature of the Commonwealth sets it apart from other groups, such as the European Union, and goes far in explaining why this very large and diverse grouping of countries has stood together for almost 65 years. Countries have been free to leave in that period as well as apply for admission, but the core values shared by these member states – freedom and liberty – have not been altered. We are the better for it.
And so today we remember, not just the evils and injustices of 95 years ago but of the benefits that we have today as a result. The freedom and liberty that Canadians enjoy are in no small part the result of the injustices suffered during the Great War.
Canada’s Conscription Crisis in particular was a critical albeit costly coming of age moment. The Statute of Westminster that it resulted in freed Canada and the other Dominions from forced service to a Crown it never voted for. In its place was formed a voluntary Commonwealth of Nations, joined by certain principles and rights but not irrevocably so. Countries can choose to not adhere to these principles, but the Commonwealth will have nothing to do with them if they choose this path. Despite being a stalemate for many years the Great War did accomplish much. The formation of the voluntary union of the Commonwealth might not have been so without it.
And for this, in addition to the thoughts of those who perished and their families, we remember.
Recently, in the offices of the Mayor of the city of Nablus, Palestine, the missing pieces that would permit a just and lasting peace in the Middle East to flourish may have been presented. If harmony can be restored (as it can) within the social fabric that underlies the political fabric, peace finally becomes a possibility. If women, who are respected, not marginalized, in Palestinian and Israeli society will take center stage a fundamental rapprochement can be effected. Might this happen?
On February 14th, an American resident of Israel, Sharon Sullivan, who leads a gallant, if tiny, new group called “the Fellowship of Mothers” met with nine Palestinian women leaders under the generous auspices of Ghassan W. Shakaa, Mayor of Nablus, and Benyamim and Yefet Tsedaka, two social leaders of the Israelite-Samaritan community, and three members of the Samaritan Committee of the Mount Gerizim Community over Nablus. The meeting was led by Third Deputy Mayor Rima M. Zeid Al-Keilani.
This is not just one more story of an admirable but marginal “women for peace” movement. This is “women for harmony,” a subtle but profound distinction. The Fellowship of Mothers, while tiny, is possessed of an extraordinarily powerful narrative.
Its narrative was formulated with the key guidance of an internationally admired USC management professor, a paradigm shifter, Dave Logan, co-author of Tribal Leadership: Leveraging Natural Groups to Build a Thriving Organization:
God had a plan for the descendants of both Sarah (the Hebrew matriarch of the Israelites) and Hagar (the Egyptian matriarch of the Arabs). To not allow Hagar’s offspring [the Ishmaelites] to be a great nation goes against God’s will. To not allow Sarah’s children to live in peace is also a violation of God’s will. There were promises made, and hope given, by the same God to both women. So God bridges the divide between “us” and “them.”
As Sullivan trenchantly observes: “We are outraged at the idea that the family relationship is denied by claims of Israelis being Western implants and of Palestinians not being accorded equal rights in the land that was, and under conditions of harmony, soon again would be, flowing with milk and honey. We focus on this as a ‘lie of men’ with indignation, rejecting it.”
The essence of the genius of the tiny Fellowship of Mothers is that peace is an outcome, not an input. Peace is the natural state resulting from social harmony. And social harmony comes from a high social rapport … which can be established.
While not implying that any political changes are in order — assuredly that would be premature, political structures typically following, rather than leading, the social consensus — it should be obvious by now that it is impossible to impose peace diplomatically — whether from the United Nations, or Washington, London, Moscow, or Oslo — or politically … from Jerusalem (known by the Arab branch of this family as Al Quds) — the capital both of Israel and Palestine. We now have not peace but an uneasy truce.
Peace can no more be forced to flower than a flower can be forced to blossom. Peace only can be, yet will be, an outcome of social harmony. Men, intrinsically more bellicose than women, have failed to deliver it. People who authentically like and respect one another can work through any problem. Antagonists, however, always will find a pretext for fighting. Only women, and, especially, mothers (such as Sullivan), have the discernment and innate authority to create, indeed insist upon, mutual respect and, with it, social harmony.
So the missing piece for Peace: resolve the underlying cause of strife rather than tussling with the symptoms. This calls for effecting a “family reconciliation” leading to vibrant social harmony. To accomplish this requires the formal recognition of the unique, and necessary, exercise of authority by women. Men have failed, for almost 4,000 years, to effect harmony between the descendants of two of the sons of the same great-grandfather, their mutual Patriarch, Abraham. Time for the daughters of Abraham to take on the responsibility and assert their authority.
Mayor Shakaa, himself a holder of the Samaritan Medal of Peace (2006), courageously organized for Sullivan the opportunity to meet with nine social lionesses of Nablus, among them Miriam Altif, an Israelite Samaritan. It took courage for Sullivan to accept this invitation. The trip from Jerusalem to Nablus is not for the faint of heart. Sullivan was accompanied only by her doughty Israeli fiancée, Haimon Eretz, and by Daniel Estrin, an AP reporter and Sullivan’s friend. She was received in Nablus by, in addition to her Palestinian hosts, a delegation of Israelite-Samaritans from their nearby Mountain of Blessings community, Kiryat Luza.
There is authentic historic significance to the presence of the Samaritans, the descendants of the northern Israelite tribes. Few are unfamiliar with the parable, told by Jesus, of the “Good Samaritan.” Far fewer know who the Samaritans are: the authentic representatives of the famed legendary “Lost Tribes of Israel” … who staged a tax revolt upon the death of Solomon.
Solomon’s son, as recorded in the Biblical books of Kings and Chronicles, ascending to power, confronted a very Tea-Party-like revolt by the ten northern tribes of the Kingdom against the crushing taxes imposed by King Solomon. Solomon’s successor to the throne contemptuously ignored pleas for a tax cut and, instead, raised taxes. This precipitated secession by the ten northern tribes, who created the Kingdom of Israel centered in the land of Samaria. When, later, this nation fell to invaders its people became known as “Samaritans,” or, more accurately, the Israelite Samaritans.
Fewer still are aware that a modest, fascinating, community of Samaritans lives on to this day. Mark Twain meeting a Samaritan elder wrote of the experience, in The Innocents Abroad, as to have been “just as one would stare at a living mastodon.” There are, as of this writing, 754 Israelite Samaritans. Almost half reside in Palestine and the balance live in Israel. The Israelite Samaritans live meticulously according to millennia-old Biblical traditions. Their High Priest Aaron b. Ab-Hisda b. High Priest Jacob, is the 132nd lineal descendent of Aaron, the brother of Moses. Yes, Moses’s blood great-grandnephew is alive and well.
Of key importance, this tiny noble community lives on terms of harmony and mutual respect with both the Arabs and the Israelis — possessing dual citizenship. The Mountain of Blessings, of Biblical fame, has given the world not just a “Good Samaritan” but four clans who might be called great Samaritans: Cohen, Tsedaka, Danfi, and Marhib.
The Samaritans, as thoughtfully described by writer Benjamin Balint in Tablet Magazine, tend toward insularity. One of their social leaders, the scholarly Benyamim Tsedaka, publisher of the A-B Samaritan News, translator and editor, with co-editor Ms. Sullivan, of the first English translation of the Israelite Samaritan version of the Holy Scriptures, however, is internationally celebrated. This Great Israelite Samaritan, Tsedaka, over the last three decades, has made an annual international goodwill tour to many of the capitals, and leading cities, of the world.
During one of his goodwill tours, seven years ago, this columnist established an enduring personal friendship with Tsedaka and, later, was given the honor of serving, along with Sullivan, among others, on the board of the Samaritan Medal Foundation that Tsedaka founded and chairs. This body grants medals for Peace, humanitarian achievement, and scholarly studies. The Fellowship works inside the halo of moral authority of the only authentic Biblical Samaritans. Tsedaka, thus, is the moral godfather of the Fellowship of Mothers.
It is early in the process. But the tea party in the office of the Nablus Mayor reportedly was electric. Sullivan:
Each woman introduced herself and told a bit of her background in business, mothering, peacemaking (and in one case – prison). Yes, we had among us a Palestinian woman who had been released in a prisoner exchange between Israelis and Palestinians.
Haimon talked (as the only Israeli there — non-Samaritan — which was a big deal to the group of women there). Haimon’s opening line was ‘I look around and I see family. Look at us. We all look alike. One is no different than the other.’ It was sweet. He spoke of his Grandfather who was born in Gaza, long before this conflict began, to which women from Palestine exclaimed ‘You’re Palestinian!’
The Fellowship of Mothers, like the Samaritan people, is a small group with a powerful narrative and a big commitment. And as Margaret Mead said, “Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has.” May the women of Palestine and Israel now assert, under the auspices of the noble Israelite Samaritans, their authority, bring about this family reconciliation, restore social harmony, and, with harmony firmly established, show the whole world how a just and lasting peace really blossoms.
This article was previously published at Forbes.com.