What is Putin's Aim?

 

Russia has its ups and downs. It has been invaded at least four dozen times, and the invasions have typically come through nine gaps in the terrain on the edges of Russia. If the world was a peaceful place, the lack of Russian control of the gaps might not concern Putin. Russia has typically not known peace with the rest of the world during my lifetime. I think back, for example, to that period of 1995 to 1998. The Soviet Union had collapsed and so had the Russian economy. The ruble should have been devalued, but the IMF exerted pressure on Russia to maintain the ruble’s value, thereby choking its economy (Russian products were priced too high for export, while imports took the place of domestic consumption of Russian made goods). The poverty level went from 2% to 40% and the average life expectancy of the Russian male went from 78 years to 55 years. It is tempting to think that such was the crucible in which Putin’s ambitions were formed. I suspect he wants to make sure that the world can never dictate to Russia again. One way to do that is to plug those gaps. The biggest is the European Plain which is about 3000 kilometers wide in western Russia, but narrows in the north to about 250 kilometers just east of Warsaw, and in the south sees its narrowing where Moldova meets Romania. Bucharest sits in the middle of the southwestern opening to the gap. I think Putin’s aim is to take Ukraine so that he has easy access to Warsaw and Bucharest. Plug those gaps.

Taking Ukraine also removes an unfriendly border much further west. As it stands, Ukraine is less than 500 kilometers from Moscow. One can see why Russia does not want NATO forces on Ukrainian territory.

The implication of the foregoing is that Ukraine is a stepping stone and that eventually, Russia will kinetically clash with NATO countries. Poland was the line in the sand in advance of World War II. It seems it may be again. It is very important for the West to bog Russia down in the Ukraine so that invasion of Poland and Romania becomes impractical.

Hence the West sends weapons to Ukraine.  But there are problems with doing so. I see this Reuters report on Russia last week destroying a large cache of weapons from the west stored in Odessa: https://www.reuters.com/world/europe/russia-says-it-destroyed-odesa-terminal-where-foreign-weapons-were-stored-2022-04-23/.

Even when weapons are supplied, making them effective is a major challenge. What if they are destroyed in storage? What if logistics are such that the weapons don’t make it to the battlefields in time? What if the weapons arrive, but the troops do not know how to use them?  What if the troops know how to use them, but have taken so many casualties by the time the weapons arrive that there is not enough manpower to deploy the weapons effectively? Each of these problems can be magnified by Russian intervention. 

It is hard to see the war ending soon. A problem is that the longer the war drags on, the more it appears, particularly to Russia’s population, that Russia is losing. Putin cannot afford to lose. If he thinks he is losing, will he withdraw with his tail between his legs, or will he choose the nuclear option? But if he wins in Ukraine, he will likely continue into NATO lands, which also could easily lead to nuclear weapons usage.

In the meantime, Russia grows richer. Think of it: when Russia is earning billions of dollars monthly for its oil and gas exports, but not spending anything on imports, its monetary reserves are going to rise quickly. This enables Russia to afford war.

China is quietly becoming increasingly sympathetic towards Russia. Soon it may seem like Russia and China against the world. “Just you and me, Babe.” They have similar views on how to control their populaces. They are both ruthless in dealing with peoples they are oppressing. They have similar demographic collapses. They share a 4300 kilometer border. I am reminded of the prophecy of Daniel 11, where in verse 44 we find that “news out of the east and out of the north” leads to a great war that is elsewhere called Armageddon. To the east and to the north of the near east, which is the geographical focal point of the Bible, are China and Russia. Just saying…...

Why Prices are not Rising, and Why I Do Not Want the Liberal Government Defeated Just Yet

There is an article in the July-August number of Foreign Affairs on the magic of easy money. The author, obviously knowledgeable, as writers in the magazine tend to be, discusses the huge expansion of the money supply and expresses perplexity at how it is that prices have not been rising accordingly.  Recently I saw a similar puzzlement expressed in an article found in The Atlantic. Talented financial writers note that we are flooded with money without price inflation. They find it even more remarkable in the absence of increased production of goods and services. You could understand prices not going up if the production was rising just as quickly, but the current case consists of much more money chasing after fewer goods and services. How can that be? We don’t know, they say; it’s a mystery, but it is how it is, and apparently we can print unlimited money without price inflation resulting. 

What they are missing is that the extra money is not chasing goods and services very hard. The velocity of money has slowed way down. People aren’t spending. At least, not quickly. This is a behavior that characterized the Great Depression. The Social Credit Party recognized the congruence between the low velocity of money and depression and tried to use their “funny money” to raise the frequency of economic transactions. The value of their money was programmed to decline by a fixed amount each week. One had to spend it to get rid of it to avoid the erosion.

The drop in the velocity of money is one indicator that we are in a depression. I don’t think that we may be sliding into it; I think we are in the early stages already. It will last for several years, and damage will be high.

I do not want to imply that the velocity of money is an independent phenomenon. It is dependent on individuals making decisions about whether to spend. The question each person has is which do they want more --- the money, or the goods and services? It appears that right now people have become inclined to choose money more readily than they were before the pandemic. I attribute it to their uncertainty about the future.

We might view the velocity of money as nothing more than the velocity of goods as Henry Hazlitt argued --- a function of decreased demand. Decreased demand tends towards economic slowdown: why produce what people don’t want?

My expectation is that once people begin to feel more certain about the future, or at least more certain about the probability of some plausible futures, particularly in regards to a decreased likelihood of outliers they today view with alarm, they will once again be wanting to buy more. And they will be operating with more cash. The M1 money supply has grown with the government having created cash out of credit. The result will be a run-up in prices. The chickens will come home to roost.

My guess is that we are already in a depression (a lengthy and deep slowdown in production) which will tend to be a deflationary depression that will turn into an inflationary depression. People are going to get hurt. And it will last for several years at least.

Most of the readers of this blog are Americans. I don’t know why, but the preponderance of hits comes from the USA, albeit not in the numbers that used to be obtained when I posted frequently. I am out of the habit and probably should have a set time each day to say something here. To you Americans, thanks for coming, but I want to comment now on the current state of federal politics in Canada.

The State of Canadian Federal Politics

Until the Liberals were elected with a majority in 2015, we had a competent Minister of Finance, Jim Flaherty. The Conservative Party of Canada supported lower taxation, less intrusive government, and reduction in trade impediments. That government planted the seed that yielded the harvest of a robust economy for which the current Liberal government under a seemingly juvenile Prime Minister and none too capable Minister of Finance have taken credit. The Liberals, who really are not liberals, have until recently had wide popular support among Canadians. Not hard to be popular when you are buying their votes. In the 2019 election, the Liberals were reduced to a minority, with four other parties holding seats. Today, the Liberals only need the support of one of the three larger opposition parties in order to govern. During the pandemic, polls have been showing that if an election were called, the Liberals would trounce the opposition.

Enter the revelation of evidence that has led many of us to conclude that our PM and Minister of Finance are probably crooks. The Finance Committee of the House of Commons and the Ethics Committee have been investigating a series of transactions that have sunk Liberal popularity. Further, the Conservative Party of Canada has requested inquiries of four Parliamentary officers: the Auditor General, the Procurement Ombudsman, the Ethics Commissioner and the Lobbying Commissioner.  The CPC has also asked the RCMP to determine if a criminal investigation is warranted.

Recently, the leader of the Bloc Québécois (one of the opposition parties) has demanded the resignation of the two villains and the Chief of Staff of the PMO (Prime Minister’s Office) under threat of making a motion of non-confidence in the House, which presumably he thinks will be supported by the other opposition parties.

At the same time, the party that is the Official Opposition by reason of their large holding of seats in the House of Commons, the CPC, is in the midst of selecting a new leader. It appears to me that at least two of the four contenders are highly eager to become Prime Minister, and both have stated their desire to topple the Liberal government soon.

My guess is that the winner of the next election is likely to be the Conservative Party of Canada. They are falling into the same trap they did in 1930. The outgoing Liberal PM, Mackenzie King, made a deliberate choice to not win the 1930 election because he was afraid that the winner would be blamed for the depression. He was right. The new Conservative PM later moved away from Canada to the UK, and there were no more than four people to see him off at the Port of Montreal when he left.  The Liberal Party, coming to power again in 1935, had a half-century of almost uninterrupted power. I see the same thing happening again. I am not a CPC member, but their official policy position is closer to what I think is good for this country than any other party’s…..by a long shot. They will be blamed for the current depression and their ideology will be blamed, which is even worse.

The NDP has no money with which to mount an effective election campaign, so maybe the NDP will keep the Liberals in office. Better yet, maybe the CPC will have the wisdom and the restraint to let the Liberals reap the whirlwind. I do hope so.

After the Pandemic.....

We are all wondering what the post-Covid-19 world will be like. Perhaps new habits will have been built. Perhaps people will decide that they can work at home, and employers may decide they don’t really need to rent as much space as they have been. Perhaps people will like not having to fill their cars more than once every several weeks. I don’t know the probability of such outcomes.

I do have a stronger opinion about macro-economic consequences. One thing the pandemic has done is to help Americans realize more than ever that they prefer short supply lines. Why manufacture in Asia?  Which is cheaper --- having 3000 laborers weaving textiles in a shop in India, or building a robotic based factory in Indiana run by 3 people and weaving more cloth more consistently? After the capital cost is incurred, it is much cheaper manufacturing in America, and there are lower distribution costs and more secure distribution channels.

Franklin Roosevelt, shortly before he died, invited representatives from 44 Allied nations to a conference at a resort in New Hampshire called Bretton Woods. There a trade deal was sold. America would now use its mighty navy to keep the seas safe for shipping, removing much of the risk. In the not so distant past, the lay of the land was that empires coalesced around major powers who just took what they wanted. A country needed to be in an empire to have a market and military support. Bretton Woods changed that. 

Shortly thereafter, a strange thing happened. Roosevelt, who along with his wife was a friend to the Soviets, seeing them as allies and realizing that is was mainly the Soviets who were beating back Germany, was replaced by Harry Truman. Right from the start, Truman seemed hostile to the Soviets. It was like he expected them to be enemies, and soon they were. The Bretton Woods arrangement now was for countries that were not allied with the USSR, and the world prospered. America gave free military protection to ensure safe trade, except for the price that the recipient was not to side with the USSR.

Close to 50 years later, the USSR disintegrated. The reason behind Bretton Woods was no longer relevant. America began to lose interest in international networking. Clinton was a domestic president with almost zero interest in foreign affairs. He would cram from notes before a meeting with a representative from another country, pass the meeting with flying colors, and then forget about it. Bush II, Obama and Trump have not been much better. There has been no reason to be. America is a self-contained economy whose exports are well under 10% of its GDP. She is resource rich and doesn’t need to import much. So the USA is paying the cost of keeping sea lanes safe for what? It had been to encourage beneficiary nations to stay out of the Soviet camp, but the USSR folded up. So what has the reason been these last three decades? I don’t think Americans know. Donald Trump is wondering the same thing. His America First policy is euphemistic for withdrawing America into a continental economy that is not dependant on the rest of the world.

Unlike China. China has a population pyramid that is fat near the top. A huge portion of its population is moving into their senior years when consumption is typically rather low. So China does not have sufficient domestic demand to consume its production. China has depended on the USA to do that. The USA is getting tired of the sub-standard junk China produces and is pulling back from Sino-American trade.

But there’s a larger issue here. Throughout history, there have been many instances of an aspiring super-power expanding and flexing its wings to the point where the existing super-power feels uncomfortable. I could probably cite about two dozen such cases from the last 3,000 years. These situations have usually resulted in a war between the two. We can start with the alliance of Babylonia and the Medes demolishing Assyria, continue to the Medes and Persians conquering Babylon, and so on through many centuries to the first real world war, the Seven Years War, waged in Europe, North America, and Asia. Then the super-power was France, and Britain and Prussia each aspired to the status and took on France, with whom the empires of Russia, Austria-Hungary, and Sweden allied. We see Prussia challenging France again in the Franco-Prussian War of the 1870s. Japan grew to attack the more predominant Russia in the very early 1900s and America in 1941. Now we see China rising and America getting in the way. The probability, it seems to me, is war between the two. I mean a shooting war.

Such a war would help China hold together. We forget that unity is not the natural way of China. The Mongols forced it on them. So did Mao. But these are historical aberrations. See https://www.youtube.com/watch?v=UWqVzZnwnOk for an interesting several minutes. Add to that the fact that 1.1 billion people in China are in the bottom economic class and require financial help. As the Chinese economy falters and stumbles for lack of markets and from the stress of a relatively small proportion of the population producing most of the goods and services and having to support the majority, there will be a tendency to blame the government. If the Chinese Communist Party learned from the Arab Spring, the leaders will want to avoid a Chinese equivalent. Something will be needed to divert attention. War usually does a good job of that.

Now, maybe the parties will be cool and realize that China would have no hope of defeating the USA. One Nimitz class carrier has more firepower than all the other navies of the world put together, and the USA has 11 of them. China’s navy is mainly short and intermediate-range. And in the air, a typical American fighter pilot would have to be incredibly inept and unlucky and a Chinese pilot just as incredibly lucky for there to be a Chinese win in a confrontation between the two.

Maybe there will just be a cold war. Makes sense. America with a handful of trading partners --- Canada, Mexico, the UK, Australia, New Zealand, Japan, South Korea and select countries in South America --- versus China and a much bigger trading community. We may even see Central American countries cozy with China. China is investing there, as in many other regions. For example, they are planning a super-highway across Costa Rica, from Limon up through Guapiles and on to the Pacific coast. The idea is to ship freight overland rather than paying $500,000 for one freighter to make one pass through the Panama Canal. The oligarchy that are members of Panama’s Union Club will likely want to keep ties with the USA, and America may be motivated by the strategic location of Panama, so Panama may be America’s beacon in Central America.

Another country that stands to be hurt in a major way by shifting trade relationships is Germany. Whereas China is a major exporter of crap with about 20% of its GDP being exported, Germany is a major exporter of high quality, highly functional manufactured goods. Half of Germany’s GDP is exported, so she needs a continued market. The USA, turning inwards now even more so as a result of the current pandemic, is more interested in revitalizing domestic industry and supply chains than in keeping Germany in business. The rest of Europe is not enough of a market. When 50% of your GDP is exports, even a 1/5 decline in exports is a 10% drop in GDP. That’s huge.

With a new order shaping up, plus more and more businesses failing the longer the world is locked down, the chances of a major depression continue to grow. I know there is all this wishful thinking about pent-up demand --- the idea that people will buy with a vengeance once they can again --- but I don’t agree. When this shutdown is done, I am not going out to get three haircuts. 70% of Canada’s GDP is services. Services unrendered are lost revenue.

My apologies for rambling a bit here, but I think we need to be thinking outside the contemporary box, and more in line with the broader background of history. I hope this essay provokes you to think longer and more deeply about the state of the world than you have.

Philppa Gregory and the mid-1600s

I recently finished reading Virgin Earth by Philippa Gregory. It is a dramatized treatment of life in the last days of Charles I and during the Cromwell years. I have only ever known of the events of those days from a very high level: Charles was beheaded; Cromwell was a puritan and very harsh with the Irish; Charles II was a hedonist and tolerant of other beliefs. I know a lot more now. I found the book an engaging read.