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Antonomon  1yr ago (novum.substack.com)   1752 thread views

"What if your entire worldview was just because of near-zero interest rates?"

novum.substack.com

Since the Great Recession, the Fed has transformed itself into an entity more and more responsible for asset prices. This was the stated goal since 2009 as the Fed adopted a new philosophy called the "Wealth Effect." The thinking behind it was simple: growth in asset prices would translate to an increase in consumer spending and hence demand itself. It was a 'trickle down' economic philosophy an increasingly financialized economy.

This backdrop has defined our post-2009 era which stirred certain pathologies that were reflected in the greater culture and politics. It was the time when 'finance became a culture' and actual-productivity plummeted across most developed economies, especially the United States. But somehow in spite of the accumulating dysfunction across most key areas, everything kept trudging along, partly thanks to investors being satiated with record returns.

While the near-zero interest rate regime may now be ending, it is worth considering how much of the water we were all swimming in excused poor state capacity, distorted economic fundamentals, and how it even kept a lid on the dysfunction potentially blowing up in our faces. Now that we have to reckon with these realities, it may be wise to ask how many worldviews were simply products of the the cheap money regime - which is now, in a shock to many, coming to a close. Whether or not it will easily be let go, however, is another matter.

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COVID response was a classic example of this. Aside from the very early days of pop-up hospitals, the logic was far more 'how do we preserve the current medical system with its red tape and bureaucracy' than 'how do we provide treatment efficiently'

Look at this graph. It shows the yield on inflation indexed 30 year U.S. treasury bonds. That tells you what the long run risk free real interest rate is. The Federal Reserve has no control over it. It is determined by the supply and demand for capital. It has been below 2% (the long run historical average) for over a decade. Most of the time, it has been at around 1% or lower.

This number should be inversely proportional to asset prices. It also proportional to asset returns. Low interest rates have not increased investment returns. Low interest rates correspond with lower returns.

Whether low interest rates increase wealth depends on the reason interest rates are low. If it's because of a reduced demand for capital, then wealth decreases. If it's because of an increased supply of capital, then wealth increases.

I don't understand your issue with stock buybacks. It's just another way for companies to give money back to the shareholders. It is the responsible thing to do if they can't put it to good use. The investors who sell their stock can invest that money elsewhere or spend it. Why should companies waste it on R&D that they don't think will generate a good enough return? If interest rates are low, they would only do this if the returns to the R&D were very low.

I also don't understand the issue with financialization. Financialization is good for many reasons, not least of which is the lower interest rates. It allows people to invest their savings more easily with less risk. The fact that this leads to higher asset prices is a consequence of the value created by financialization. The low interest rates make capital affordable for investment opportunities with lower expected returns. It increases the capital stock and grows the economy.

The increased housing prices due to financialization is also a very good thing. Higher property values make homeowners, who make up the majority of the population in Canada and the United States, richer. It makes new housing construction more profitable, which increases the housing supply, and lowers rents. An increased housing supply driven by lower real interest rates makes mortgages more affordable, because interest payments fall.

This number should be inversely proportional to asset prices.

Nit: The association is definitely negative - but not inversely proportional. As a reductio ad absurdum, when that graph went negative, asset prices didn't go negative. The reasons are

  1. Much of the returns on stocks are to compensate investors for risk. Especially when interest rates are ~0, the financial market is much less a market for funding ideas and much more a market for distributing risk. For instance, many tech startups have negligible financial costs but request funding anyway so the founders can draw a salary while they hack away for a year or two. This is very much not an investment in the business and very much the founders trading some expected returns for offloading risk onto venture capitalists.

  2. If there are no risk-free assets that maintain their value in the face of inflation, then it is completely logically consistent for real interest rates to be negative. The fact interest rates went negative in 2020 suggests this is, indeed, the case.

  3. About 26% of government bonds held by the federal reserve have more than 10 years remaining until maturity. So, contrary to your claim ("The Federal Reserve has no control over it"), the Fed has some control over these yields.

  4. Federal regulations require financial institutions to hold certain amounts of low-risk assets. This increases demand for such assets and artificially drives risk-free yields lower relative to risky yields.

I think too many people think the alternative to buybacks is paying labor more when it's really paying owners dividends.

If someone hates the buyback game then they should look at M and A. Something like 70%+ is unwound within a decade. Turns out Corporate types are generally good at running focused businesses and bad at empire building. GE, Citigroup, Bhc, AIG, ATT with HBO/TimeWarner, Time again with AOL. FB with WhatsApp though ok when they’ve bought other parallel social networks. And on the RD side tell me what businesses Bell Labs or Google or xerox profited from?

Most people think buybacks disappear but they do flow to shareholders who find better ways to invest in vc.

Surprised there isn't as much discussion of the culture war implications as I expected, though I guess if the thesis of "cheap Fed money -> highly-permissive investing environment -> tech startup explosion" is true, then it automatically explains a lot of the CW and can thus be mostly left to the reader's imagination. Question then is: what will the world look like if "cheap money" goes away? Will "soft tech" like social media take a permanent hit a la China? (Relatedly: what's going on with tech stocks right now?) Will the Culture War somehow cool down in light of a new economic reality? (Confounder: the Culture War started and grew during a time where you could say the economy was also screwed up, just in a different way.) And in light of what's going on with Twitter, will it even matter whether or not investors are happy?

My unfounded, inexpert prediction: there will probably have to be an economic correction at the expensive of financialists sometime in the medium-term future (like 10 years at most). I feel like the proverbial "other shoe" has been poised to drop for years now.

The culture war will continue until a new equilibrium is reached on certain key issues, or until political representation matches 1:1ish with demographics.

It wasn't tech, it was probably the southern strategy that started it and the Obama admin/Republican legislature deadlocks that brought it to it's current state, on the political side.

All across economics there's way too much interest in the demand side, not nearly enough in supply-side economics.

In Australia, there's a proposal to put a price cap on domestically sold natural gas, which we are a major producer and exporter of. Because the Europeans don't want to buy Russian gas (and someone influential is blowing up pipelines in pursuit of this agenda), they've been sucking out the gas from the rest of the world. The Australian gas industry is unhappy with the pipe caps and threatens to withdraw investment. 'Greedy companies making super-profits' on one side and 'Soviet style planned economy, Venezuela' on the other.

But nobody, gas companies excepted, is thinking about how to produce more gas! No matter how we or anyone manipulates the prices or export control orders, we cannot legislate gas out of the ground. We should've been producing more gas from the get-go, approving projects for export and domestic consumption. That directly alleviates the core problem, which is a shortage of supply. We could have a simple, quick regulatory system for gas production. Instead we have a very slow, expensive system where various interest groups get to wage lawfare against development. And so we get less gas. House prices are similar, that's the NIMBY issue in a nutshell. Power prices are another issue, nobody wants to build any new coal plants due to climate targets and so the price of power rises continually. There are costs to producing gas, issues with basins getting contaminated and so on. But there are also costs to having a giant legal mess of regulation constraining development for 6 years on a single project. It doesn't take that long to drill gas wells. There's plenty of gas in the ground.

A good way to reduce inflation is to lower energy prices. Energy prices are included in just about everything else. Yet instead everyone is just focusing on reducing demand by raising mortgage repayments. It wasn't macro-economic reform that produced the industrial revolution, it wasn't central banks making steam engines and industry. It was actual technical development and the efficient allocation of capital that made people richer, something governments don't seem to appreciate. If they want to make the economy better, they need to do micro-economic reform to make it easier to generate wealth.

I think one cause of excessive amounts of capital rushing into financial schemes, apps and crypto is that the real world is chock full of regulations that make it too complicated to build anything. Want to build apartments, factories, railways, gas wells? You need permission, you need to consult stakeholders, you need to get environmental assessments, consult indigenous peoples, protect 'vulnerable' species, pass endless legal checks. If you want to make something in crypto, you can just get going, release your white paper, airdrop your tokens, get the software working. Now the cost of this is that there are a bunch of scams and shitcoins. But there is certainly no shortage of innovation, things happen quickly.

Near zero interest rates could have encouraged broad development across the whole of society. The US at least managed a fracking boom that is paying off nicely now. I think regulations channeled too much of this money into 'tech' and housing. Finance is a culture because much of industry has been crippled.

We should've been producing more gas from the get-go, approving projects for export and domestic consumption.

Is this feasible within a relevant time-window? Production today is not based on yesterday's decisions, but instead those decisions made 3, 5, and 10 years ago regarding regulatory, investment, and infrastructural resource allocation. Thus, decisions being made today about production infrastructure and investment shouldn't be based on today's needs for more/less gas, but on estimations of the need for gas in 3, 5, and 10 years. The price, on the other hand, reflects demand today, irrespective of future or past projections or investments. Thus, the two are far less related than one might ordinarily suppose. Insofar as they reflect a broad-based general trend in demand, yes, prices are a good spur to investment and future build-out. However, when there is a lag in build-out's ability to ramp up production in the short term, and the price spike is caused by a short-term or otherwise exceptionally unpredictable event like a natural disaster or war, then the price is likely not a good guide to what the future may require.

This is why it's reasonable to discuss price caps for this kind of black swan event; it's not the kind of thing that could reasonably have been anticipated within the timescales necessary to ramp production, and no action taken today is able to reduce the price through increasing supply within a reasonable timeframe (or even one that reasonably guarantees the black swan effect's will still be applicable at the end of the preparatory period). Thus, it's proper to take into account the societal effects of a sudden and unearned windfall profit vs the costs to the citizenry who see prices spike uncontrollably.

Black swan? Inflation was entirely predictable - right wing economists and even just common sense lay people were screaming warnings about the trillions of money printing that was going on for years. What was the response? Memes about “heh money printer go brrrr”.

Yeah, the administration has no excuse for forgetting basic rules about money and inflation. This could have been entirely avoided

As many have said before me in other contexts, if someone has predicted inflation for years, then they haven't predicted anything. It's like Marxists constantly predicting that revolution is coming.

And, by "black swan" event, I take OP to be referring to the developments -- COVID, etc, that led policymakers to take steps to increase the money supply. Note that M2 steadily increased for years without causing inflation, so those who for years said that those increases would cause inflation appear to have been wrong. OTOH the increase in M2 during COVID was much sharper than in the past but even that did not cause inflation until after personal consumption recovered. Given that drop in consumption and the concomitant risk of recession, anti-recessionary money policy was the correct move. The hard part was, as it always is, figuring out when and how quickly to reverse course, but those who warned of inflation "for years" have nothing to say about that.

As many have said before me in other contexts, if someone has predicted inflation for years, then they haven't predicted anything. It's like Marxists constantly predicting that revolution is coming.

They were only predicting it for the last couple of years, and to be fair it was eminently predictable - you print money recklessly and you cut supply then you get inflation. It’s pretty basic stuff.

Given that drop in consumption and the concomitant risk of recession, anti-recessionary money policy was the correct move.

Aren’t we now in a recession? One we can’t print our way out of due to aforementioned inflation? Seems it wasn’t the right move after all.

  1. The claim was not that they were only predicting it for the last couple of years, and in fact they have been predicting it forever.

  2. No, we are not in a recession, not by the measure used by the popular press nor by unemployment nor by other measures used by the NBER.

  3. As an aside, I never know whether people who say "printing money" (rather than "increasing the money supply") mean that literally or figuratively. Those who mean it literally are, of course, not to be taken seriously, given how little of the money supply is composed of currency.

The claim was not that they were only predicting it for the last couple of years, and in fact they have been predicting it forever.

I disagree. Inflation fears were never a major concern until recently. This is obvious to anyone paying attention.

not by the measure used by the popular press

You mean the leftist media? The one who edited the Wikipedia definition on what counts as a “recession”. Sorry I don’t take this view seriously, I take the conventional view on what counts as recession, no matter how damaging this might be for Biden

  1. They have been a major concern for the "right wing economists" that you referred to in your original post, "for years." (Your emphasis)

  2. No, not the "leftist media," which you would know if you had bothered to click on the link, which was to real GDP, which is precisely "the conventional view on what counts as a recession" to which you refer, and to which I was referring.

Honestly, your references to the "leftist media" and failure to engage with the evidence I presented in response to your query causes me to infer that you are only interested in waging the culture war, which does not interest me. You asked a question, and I answered it, with evidence. If the answer is inconvenient for you, I'm sorry.

I disagree. Inflation fears were never a major concern until recently

To be fair, Austrian Economists have been harping on it for decades.

Higher prices aren't just about encouraging quantity supplied, they are about reining in quantity demanded.

Higher gas prices mean consumers will attempt to avoid using gas where they can, and less-productive uses of gas in industry will fall by the wayside. This is as true of gas as it is of every product. This is an important function of prices in an economy.

Also worth pointing out: "russia invaded a country so we aren't taking their gas anymore" is not a black swan, being as it is an entirely logical outcome of modern Russian warmongering. "We could hardly have foreseen Russia invading their neighbors again" is unpersuasive.

But it only makes sense for potential suppliers to build ways to take advantage if they will be able to profit from such speculative preparations when prices spike.

"russia invaded a country so we aren't taking their gas anymore" is not a black swan, being as it is an entirely logical outcome of modern Russian warmongering.

I would amend this slightly - "Russia invaded a country NATO and the EU cares about, so the EU is willing to nuke their own industries to spite the Russians" really is a black swan. No-one cares about invasions or ethnic cleansings qua invasions or ethnic cleansings; no-one was calling for gas boycotts over Transnistria or Ossetia/Abkhazia or even Crimea. Hell, Azerbaijan is currently in the process of waging a minor ethnic cleansing campaign against Armenians in Nagorno-Karabakh (which they took in an offensive war earlier this year) and no-one serious in Europe is asking to shut down Azeri petrochem transfers - instead they're desperately trying to use them to try and make up the Russian shortfall.

Production today is not based on yesterday's decisions, but instead those decisions made 3, 5, and 10 years ago regarding regulatory, investment, and infrastructural resource allocation.

Well yes, certainly. The Narrabri gas project I'm thinking about has been delayed for years now. Indeed, we're reaping the reward of regulatory decisions made years ago.

But imagine if you told Stalin in 1941 that production of T-34s and rifles was based on the previous Four Year Plan and couldn't easily be scaled... You wouldn't even get to the end of your sentence because you'd be whisked off to a factory in Siberia, working 12 hour days while the factory was built around you, sleeping in holes in the ground. I'm not asking for a Herculean effort, just an acceleration of gas production. The US started to gear up its armaments industry, giving them some kind of contract where they buy munitions at any price, just to speed things up. If you want more of something, you should try to offer some kind of incentive. If we're not going to whisk gas executives to a well-used interrogation room if they don't meet quotas, we should pay more for our energy. As long as there's no hoarding, we should stick with market economics and interfere via subsidies for consumers if necessary. We should allow gas companies to drill for gas and simplify all the red tape. I appreciate that there are stakeholders who will be affected by gas companies drilling near them. The rest of the country is being affected by high gas prices, along with the rest of the world! We are all stakeholders.

it's not the kind of thing that could reasonably have been anticipated within the timescales necessary to ramp production

We're 10 months into this war by now. Decision-makers should have been thinking about a gas shortage as soon as the Europeans decided to stop buying Russian gas. I believe they announced this in February. It really doesn't take that long to drill a gas well, 6 months maximum (onshore of course, but that's what I'm talking about). I could buy that there are problems getting the capital, piping, tools in the right places, connecting up the pipes. But we're not even at that stage, our government still wants yet more regulatory approvals before exploratory drilling can begin! This after demonizing the whole fossil fuels sector for years now, signalling that their time is over. If we had acted quickly to increase production in February, we would probably have more gas if not now than in 2023, when the effects will be felt most severely I believe.

Consider also that state governments are livid about price caps taking away some of their royalties, they want to reimbursed by the Commonwealth. There's no consistent application of the 'sudden and unearned windfall profit' mechanism. In my mind, people who are providing gas deserve it more than governments who are making it harder to extract.

But on the other hand, what does it matter whether we put price caps on or not? There's clearly no willingness to fix the root problems in the regulatory sector. We may as well take a Panadol and ignore our unbandaged wounds.

imagine if you told Stalin in 1941 that production of T-34s and rifles was based on the previous Four Year Plan and couldn't easily be scaled... You wouldn't even get to the end of your sentence because you'd be whisked off to a factory in Siberia, working 12 hour days while the factory was built around you, sleeping in holes in the ground.

Yes, and those T-34s were made to such shitty quality control standards that they often couldn't even get more than few dozen kilometers before breaking down (leading to more paranoid Stalin memos about imaginary "saboteurs"), and had truly horrendous loss-ratios against theoretically-inferior German equipment (crews killed by armor spalling/bursting due to improper heat treating, ammunition exploding in the barrel due to poor quality of either the casing or the gun itself, failure to include waterproofing so that all the electronics shorted whenever it rained/snowed/dewed heavily, failure to include optics to specification leading to crews not knowing where they were going or what they were shooting at, etc.). There's a reason why Russian armor crews - particularly T-34 crews - had such abysmal survival rates when compared against other allied (or even non-T-34-armed soviet) armored units. Rushing things under duress doesn't magically make them appear in the ways you'd want.

The US started to gear up its armaments industry, giving them some kind of contract where they buy munitions at any price, just to speed things up.

More to the point, the U.S. had a large reserve of literate and mechanically-trained workers, plus very large pre-existing civilian chemical and mechanical industries which could rapidly be converted to military production. Not quite the same situation as current gas-extraction regimes, where there is a limit on the supply and location of the relevant trained labor, as well as a lot of up-front capital costs necessary to the location, surveying, and ultimately tapping of new natural gas sources.

We're 10 months into this war by now. Decision-makers should have been thinking about a gas shortage as soon as the Europeans decided to stop buying Russian gas.

Yes, they should have. But the flows remaining cut off for years was not a foregone conclusion, either at the beginning of the war nor even when the Europeans unilaterally decided to stop buying directly from the Russians, so there's at least some excuse for them not doing so. Moreover, bureaucracies do not move quickly, so even if all the relevant political decision-makers had been unified on the need to expedite additional drilling permits back in March, I bet you dollars to donuts they would have been significantly stymied by civil service obstruction. That, plus the ideological resistance to ramping up fossil fuels production in the face of "climate crisis" activists gluing themselves to things and making life miserable for constituent-services staffers makes the current situation not all that surprising.

Consider also that state governments are livid about price caps taking away some of their royalties, they want to reimbursed by the Commonwealth. There's no consistent application of the 'sudden and unearned windfall profit' mechanism.

I completely agree that prima facie reasonable policies can be implemented from selfish, greedy, or malign motives, put into place poorly, or actively twisted to harm the putative beneficiaries. This is not good, and is reason to be mad at the implementing government agency/ies.

But on the other hand, what does it matter whether we put price caps on or not? There's clearly no willingness to fix the root problems in the regulatory sector. We may as well take a Panadol and ignore our unbandaged wounds.

TBH....I can't disagree.

I suppose the T-34 issue is a matter of trade-offs. Reliability for throughput. The 1941 models were definitely poorly made, certainly, but they were at least there when they were most needed. At least the Russians had a card they could play, even if the Germans had the full deck of ground-air coordination, good training, veteran commanders, good NCOs and combined arms warfare... They needed to get all those things before they could start counter-attacking successfully and win the war.

I bet you dollars to donuts they would have been significantly stymied by civil service obstruction. That, plus the ideological resistance to ramping up fossil fuels production in the face of "climate crisis" activists gluing themselves to things and making life miserable for constituent-services staffers makes the current situation not all that surprising.

The Narribri gas project I was talking about seems to be in our version of the 'fast lane'. But the actual gas wells haven't yet been drilled! There are apparently a few more hurdles to overcome. As you say, the civil service is still obstructing it.

While this is a major win for the Narrabri project – on which Santos has already spent more than $1.5 billion over more than 10 years – it still faces major hurdles, including planning for a pipeline to get the gas to market.

https://12ft.io/proxy?q=https%3A%2F%2Fwww.afr.com%2Fcompanies%2Fenergy%2Fnarrabri-gas-project-cleared-by-native-title-tribunal-20221220-p5c7qk

The Narribri gas project pipeline has been designated 'critical infrastructure' as of December, 10 months late. They even managed to get the planning for the pipeline through, overcoming the native title issues in the tribunal. But 'critical infrastructure' doesn't exempt it from yet more environmental assessments:

https://www.dpie.nsw.gov.au/news-and-events/articles/2022/narrabri-gas-lateral-pipeline-declared-critical

Santos can now request assessment requirements to prepare an Environmental Impact Statement (EIS), which will be subject to extensive community consultation and a full environmental assessment.

What have they been doing for the last 10 years, if not environmental impact statements? It beggars belief that this is how we handle critical infrastructure! This project could supply half of NSW's gas needs, lowering prices considerably. We could then export more gas to our allies and make a lot of money in profits and tax revenues.

I agree with you completely about the civil service obstruction but the scale is just so egregious. Why haven't we learnt the lesson that spending 10+ years on regulatory nonsense isn't wise? Nobody is talking about this, not even on the right wing who is just ideologically against price caps as a knee-jerk reaction. There's just a debate about price-cap or no price-cap, how precisely we'll introduce the price cap. It's sucked all the oxygen out of the issue.

More to the point, the U.S. had a large reserve of literate and mechanically-trained workers, plus very large pre-existing civilian chemical and mechanical industries which could rapidly be converted to military production.

Oh I meant that right now the US is buying ammunition at whatever price, to refill arsenals depleted by their Ukraine aid. Not in WW2. There are certainly capital and skill problems but they're also rooted in the regulatory system. If you have to spend $1.5 billion on legal nonsense before you can drill, why leave capital here lying idle? I'd imagine the pipe manufacturers don't have much capacity either, for the same reasons. Much the same is happening with artillery shells, which are only produced by a single American factory IIRC.

I suppose the T-34 issue is a matter of trade-offs. Reliability for throughput. The 1941 models were definitely poorly made, certainly, but they were at least there when they were most needed. At least the Russians had a card they could play, even if the Germans had the full deck of ground-air coordination, good training, veteran commanders, good NCOs and combined arms warfare... They needed to get all those things before they could start counter-attacking successfully and win the war.

This is a common argument, but I'm not persuaded by it. Surely there was something else that everyone involved in making, driving, fueling, supplying, transporting, and fixing those crappy 1941-1943-vintage T-34s could have been doing which was more productive than throwing away their time, resources, and lives into machines that either broke down before ever facing the enemy, or promptly exploded upon entering combat. That was a lot of man-hours, steel, fuel, transport capacity, and food/supplies that just got wasted, bogging down all the other, actually productive things that were happening around them.

Bringing the metaphor back to the energy space, I would argue that streamlining new projects is only useful is they're done right. Do it wrong, and you're not just gonna have to deal with sloppy externalities down the line; the productivity of the well may also suffer, or the transportation infrastructure won't be right, or...[fill in the blank].

What have they been doing for the last 10 years, if not environmental impact statements? It beggars belief that this is how we handle critical infrastructure!

I'm a Californian. We have to deal with CEQA. I sympathize.

Why haven't we learnt the lesson that spending 10+ years on regulatory nonsense isn't wise?

Because no-one thinks in terms of "10+ years of regulatory nonsense"; they each think of individual discrete steps and safeguards, each of which have their own particular justification. "Oh of course you want an ecosystems expert to look at the hydrology report, because only they are best placed to know whether this well is likely to have downstream effects on habitat vital for any threatened or endangered aquatic species..." etc. ad nauseam. Each safeguard will have its own little list of sympathetic horribles associated with noncompliance, and its own constituency militating that any cuts made in the name of regulatory expediency should fall on someone else's department/subject matter. Each of these constituencies will care about their own little fief far more than the general public will care about the general issue of bureaucratic scleroticism and compliance costs, and so it will be rare that any of these requirements will be eliminated or even temporarily waived. It's the classic story about how motivated and organized minorities run circles around large, disorganized, unmotivated majority interests over and over and over.

Oh I meant that right now the US is buying ammunition at whatever price, to refill arsenals depleted by their Ukraine aid. . . . Much the same is happening with artillery shells, which are only produced by a single American factory IIRC.

Yeah, it's not that there isn't the will to try and ameliorate a shortage; its that no-one foresaw the sudden surge in expenditure coming, and so didn't bother to keep backup production available, so now the whole supply chain has to be stood up.

Were T-34s from '41 to '43 that bad? By 1942 they had simplified production costs a lot and fixed some of the awful ergonomics. I heard that the Soviets did the numbers and worked out that they didn't need to be too reliable because they'd be destroyed quickly by the Germans anyway. What else could they do? Make more anti-tank guns and heavy tanks? That might be a competitive build in Hearts of Iron IV but I'm sure there's a reason everyone tried to have a staple medium tank. There are places heavy tanks can't go, issues with German airpower destroying tanks regardless of their frontal armour... Most academics seem to agree that the T-34 was the best tank of the war as an all-rounder. They can't just base that on the T-34/85 (which was pretty good), the '76 was alright as well.

I suppose I am arguing for the gas and assorted pipelines to be streamlined 'right' but is that really so hard? This is fairly old technology, we're the 5th largest gas exporter in the world. We ought to be capable of this. If we're not, we should aspire to be capable of this politically, legally and industrially. I think that you can and should streamline tank production in wartime, that we can and should have streamlined gas production.

It's the classic story about how motivated and organized minorities run circles around large, disorganized, unmotivated majority interests over and over and over.

True and sad, I suppose. We take these things too seriously. If there's a competition, you'd think Big Gas would be able to win. They have a big financial incentive.

Yeah, it's not that there isn't the will to try and ameliorate a shortage; its that no-one foresaw the sudden surge in expenditure coming,

Disturbing given the US has been writing all these strategic reports about the return of great power competition. Building up reserves of munitions is surely a good idea if you're worried about large-scale wars. What were they thinking? There are military planners whose whole job is to make sure things like this don't happen, that the US/NATO doesn't get caught off guard. I would've thought maintaining capacity for large scale production of munitions would be a no-brainer. NATO spends about 20x more than Russia on military spending, you'd think their arsenals would actually be larger, yet Ukraine alone was supplying about 10x more shells to Russia pre-2014 than America was producing overall, if this twitter fellow is to be believed.

https://twitter.com/spawnofKahn/status/1554705365383757824

Were T-34s from '41 to '43 that bad?

By late '42 they had mostly figured the biggest production problems out, but legacy issues (like massively over-heating the armor steel, which caused significant interior spalling on impact and a lot of needless crew-deaths, and the absolutely nightmarish gearbox which required significant force to even get into 3rd gear, and would frequently break gear levers on attempts to get into 4th) remained for years.

I heard that the Soviets did the numbers and worked out that they didn't need to be too reliable because they'd be destroyed quickly by the Germans anyway.

I mean, maybe? But given that a lot of the problems that went into T-34 production actually caused significant combat-losses before even making contact with the enemy (breakdowns, fuel problems, lack of spare parts, defective ammunition, etc.), and also significantly reduced the performance of the tank in combat (i.e. made it much more likely that their tanks would be destroyed by "inferior" opposition), I doubt it.

What else could they do?

Focus on logistics, and adequately supporting those numbers of well-functioning vehicles and units they had. That "Enemy at the Gates" meme that the Soviets didn't have enough guns to arm all their soldiers is false - they had oodles of materiel (admittedly, much of it outdated), but their logistics were so shit, and they were so myopically-focused on things which obviously looked good on paper (i.e. the number of soldiers, tanks, etc. in front-line units) that they completely failed to ensure that their soldiers and weapons at the front were able to actually fight. They were also getting thousands upon thousands of lend-lease tanks from the western allies, including many, many, many Shermans (called "Emcha" by Russian crews). So it's not like they were hurting for medium armor; they were just shit at designing and making it.

Every technician man-hour spent repairing shitty broken T-34 gearboxes could, and arguably should, have been spent fixing supply jeeps and rail systems. Every railway carriage ton dedicated to carrying badly-equipped T-34s to the front lines could have been used instead for food, water, ammunition, or other badly-needed supplies for existing front-line units. Etc., Etc.

If there's a competition, you'd think Big Gas would be able to win.

Interestingly, a lot of big gas companies are staffed by the same PMC urbanites staffing every other ESG enterprise out there. And those folks (plus all the good ESG folks in major lending institution) took one look at projected fossil fuel usage charts which were super-optimistic about the "green transition", noticed that demand would allegedly be tanking in the mid 2020s, and stopped funding new infrastructure/exploration efforts, which wouldn't have enough time to make back their investment until fossil fuels were (allegedly) obsolete. Amazing, I know. But seriously, investment dropped by like 30%.

NATO spends about 20x more than Russia on military spending, you'd think their arsenals would actually be larger

The Pentagon, which is the lion's share of that NATO spend, has never passed an audit, and after significant reform (and finding new ways to sweep things under the rug) still can only account for 39% of its assets. Shit's broken, yo.

It does feel like an increasing amount of Western economies are just build on rent seeking and extraction of wealth produced elsewhere rather than producing wealth themselves.

Even if you define "producing wealth" as limited to manufacturing and agriculture, which you shouldn't,* the US, with less than 5% of the world's population, produces almost 17% of global manufacturing output. Germany, with 1 percent of the world's population, produces 6%. The other Western countries on that list similarly overperform. The US is obviously also a major producer of agricultural products. And I don't know if intellectual property is included in the above data re manufacturing, but if not, add that to the list: The US is obviously a world leader in the production of film, music, books, TV, etc.

*Because services also create wealth.

It’s worth noting that this is, historically, the norm- producing value, or doing important logistical tasks for getting that value to people, has always been low status with brief exceptions. Roman senators were limited on how much shipping capacity they could own, and even wealthy and important blacksmiths and millers and dyers and fullers were socially seen as more like peasants. Owning production centers was deeply low status and important people would invest in them through proxies- respectable money came from things like war, inheritance(including inheritance of farmland, as long as you didn’t work the land yourself), and government service. And most of these societies saw merchants or transportation professionals as intrinsically immoral parasites.

It just seems like distrust of meritocracy is a cultural universal at the end of the day, that a precious few societies(hanseatic league, 19th/20th century Anglo sphere, holland at certain times) manage to evade for a few decades every once in a while, and otherwise producing tangible value is inherently lower in status.

That seems like a very particular definition of meritocracy to me. Care to explain?

Sure. The historical norm is that earning your wealth is low status. High status people don’t need to earn any wealth or power; it’s owed to them for being them. The exceptions are almost all within-Hajnal European societies with heavy mercantile wealth; prototypically the hanseatic league was almost fantastically meritocratic, if corrupt, where full citizenship, guild membership, and political power were all theoretically earned, and making money(as opposed to just having it, or having it accrue to you) is high status and a ticket to influence. This is far from the historical norm; viewing people who earn money, or military commands, or whatever as distinctly second class is how most societies view things. The proper and morally correct way to have money in Ancient Rome and most of medieval Europe was to inherit it or have it be owed to you; in practice the noblemen and senators did things that were useful because they had to do something, but their economic roles contributed nothing of value whatsoever, except perhaps freeing them up to be governors and generals.

I mean, I know that historical context. What I meant was how this is meant by meritocracy when the major thing being valued is “person is doing thing”, rather than “person does thing well”. Seems to me more a necessary precondition than the thing itself.

In any case, I don’t think it necessarily holds that “distrust of meritocracy is a cultural universal” holds so strongly. Imperial China famously had a civil service that mostly drew from degree holders who took written examinations (of a particular sort, granted) for some 1.3 thousand years. This was often less meritocratic than it ideally should’ve been, because you could bribe examiners and construct some elaborate method to signal that it’s your paper, sometimes high officials would unfairly intervene for their own reputation or to aid their children, etc…but it’s very clearly an attempt at trying to separate people based on ability, and there were cases of peasants who managed to score well and gaining high posts in the government as a result.

In fact, the Europeans (and Brits in particular) were impressed enough that they copied it in the 19th century!

A lot of that was due to war. The rich were heavily the soldier class and merchants just weren’t capable of projecting power and peace so they came after the rent seeking soldiers. Merchants couldn’t keep the Huns away.

It’s only modern times where merchants and their technology creating ability began to be able to win directly over land owning soldiers (Russia). Only since deeper industrialization and the ability to produce weapons became dominant that merchants became stronger than the soldier.

Feel to blame IT and supermarket. They abstract all of the supply chain away.

The idea that prosperity requires energy inputs and not moral and spiritual rectititude is one that I would expect to be alien to the point of incomprehensibility to a non trivial amount of the population.

More can be said but not without devolving into naked outgroup bashing very quickly.

I’d say a big part of this is due to increasing separation between ‘people who make tangible things’ and ‘people who make economic decisions’. This isn’t a point about one side of the aisle deprioritizing actual production, exactly. It’s pointing out that big money is now not in actual production, it’s in investments and speculation. Black rock and vanguard just think differently than Exxon. I mean there’s a political valence to it but I don’t think that’s the relevant part- a society where large scale economic decisions are made by regulators who are tight with black rock, vanguard, Goldman-sachs, and fidelity is going to approach problems in a very different way than a society where those regulators are tight with Exxon, Boeing, and archer-Daniels midland, or one in which the latter three have bought off lawmakers who closely oversee economic regulators.

It probably doesn’t help that the most influential companies which actually produce anything produce software, which- correct me if I’m wrong here- can be copied an infinite number of times once it’s been designed, at a per unit cost that’s essentially trivial, and to a much lesser extent big pharma or defense, whose profit margins depend on regulatory permissions and price setting moreso than on cost and scale of production.

I mean that would explain why so much of the focus of energy policy is on big ticket breakthrough projects, when that’s not how culture and civilization works- culture and civilization are about replicating things we already know how to do, over and over again, every time we need the end product. Drilling an oil well is a highly skilled technical task, but it is fundamentally something that our civilization knows how to do, and knows how to do well. The bottleneck is getting physical pieces, not knowledge pieces, in place. You have to get equipment with people who know how to use it, and you have to get that stuff access to land that has oil. And these are solved problems; drilling equipment and oilmen and mineral rights are the bottleneck, not figuring out how to make an oil well to begin with. And there are lots of layers between people who understand that and people who make regulatory decisions.

Precisely, there are too many lawyers and arts students in government. I think they conceptualize their role much more abstractly than engineers or STEM people. They aren't so interested in making something happen as making people happy and interpreting procedures. ChatGPT aside, the real world cannot be persuaded or tricked, you have to force it to yield to your will.

In Australia, there was only a single engineer, one of 4 STEM graduates in the Australian parliament (83 Ministers and Shadow Ministers): https://www.torrens.edu.au/blog/what-degrees-ministers-australia-have-and-why-it-matters

In contrast, China has a heavy representation of engineers in its Politburo, about 4/7 have an engineering background including Xi. I think that proportion is higher in the lower echelons of the elite. Accordingly, whatever their other faults, China does very well in large-scale infrastructure and quick construction.

By 1997, the percentage of ministers with engineering or other technical education rose to 70 per cent, which was primarily made possible due to the promotion of technocrats. Up to 77 per cent of the governors of Chinese provinces had technical training by 1997. The foothold of technocrats in Chinese politics was at its peak in 1997 when seven members of Politburo Standing Committee had Science and Engineering degrees.

It’s been over two decades since this peak of technocrats in the government, but popular misconception among the public remains that leaders in China still come from this educational background — with Engineering degrees.

https://theprint.in/opinion/eye-on-china/chinas-top-two-leaders-have-doctoral-degrees-in-ccp-education-also-decides-political-power/682617/

Your source says:

The technocratic control of politics began to shift in the following years. In 2008, 41 per cent of the ministers had technocratic education, which further dropped to 12 per cent by 2013.

The current 19th National Congress (or party congress) of the Chinese Communist Party leadership rank is dominated by leaders with degrees in Humanities and Social Sciences. The party congress is the highest body within the CCP and meets every five years.

Four out of the seven members of the Politburo Standing Committee hold degrees in Social Science and Humanities. The majority of the Central Committee members are trained in Law, Economics, and other disciplines of Social Science.

I think that contradicts your 4/7 having engineering background figure.

And, that's ignoring that fact that if you went to school in the 70s (like Xi) and studied engineering, you spent 20% of your time studying ideology and making sure you think and say the right things.

Also, the idea that all 7 members of the 1997 standing committee had science and engineering degrees is wrong as Li Lanqing graduated from Fudan University's business management major (resume from CCTV (Chinese): http://2008.cctv.com/special/989/-1/81682.html)

To be honest, I dont think China's ability to do large scale infra is because of bureaucrats majoring in engineer and science, but because of the experience they've built up over the last ~50 years of non-stop building. Shanghai isn't able to create new subway lines in 3 years because its mayor has a STEM degree (he doesn't, though the Shanghai party secretary does), but because of all the subway building experience they've garnered since building the first Shanghai metro line in 1990.

I doubt there were more STEM grads in Aus Parliament when Australia was good at building infrastructure. And I'm pretty confident it's the same story in the US government when they were building new highways and dams and whatever.

I think that contradicts your 4/7 having engineering background figure.

I only checked their wikipedia pages, probably just miscounted. 3/7 including Xi is still a lot compared to Western countries, especially Anglo ones.

I dont think China's ability to do large scale infra is because of bureaucrats majoring in engineer and science, but because of the experience they've built up over the last ~50 years of non-stop building.

But why do they have all this experience building? Why did they build so much? India didn't build like China did despite being similarly populous. Now you could say that they decided to make engineering a national priority but why did they decide to do that? It's a chicken and egg problem.

My belief is that if politics is dominated by lawyers, it will tend to overproduce laws, treaties and so on to the detriment of everything else. If there's a problem it will be met with a law. Australia has always been dominated by lawyers and has never been a major industrial power (though that's mostly down to geography and low population IMO). China on the other hand has a rather engineering-based slant to its strategies, neglecting other aspects. They built a whole lot of housing stock as their stimulus measure (we pumped money into tech/finance), they built 2/3 of the world's high speed rail, they built artificial islands to use as strategic bases. The Three Body Problem is basically a eulogy to Chinese engineers who save the world from pinko environmentalist alien sympathizers, about heroic shape rotators struggling against evil-incompetent wordcels. You wouldn't see that in the West.

Now you don't have to have a lot of engineers in government to become a major industrial power. But it does help if you do, in my view. At the very least the government will tend to see things in a more engineering-focused way, they'll tend to incline in that direction.

A good way to reduce inflation is to lower energy prices. Energy prices are included in just about everything else.

If only we could go back ~30 years and build some nuke plants. But you hit on the issue:

the real world is chock full of regulations that make it too complicated to build anything. Want to build apartments, factories, railways, gas wells? You need permission, you need to consult stakeholders, you need to get environmental assessments, consult indigenous peoples, protect 'vulnerable' species, pass endless legal checks.

Another economic concept kicks in here.

https://en.wikipedia.org/wiki/Rent-seeking

A lot of players rose to dominant/monopolist status and wedge themselves in place so firmly that it's easier to play by their rules and pay them rather than attempt to circumvent or fight them directly. Even groups who manage to oust rent-seekers (Uber did it to the taxi cartels, for instance) really only end up attempting to re-create that rent-seeking behavior for their own benefit, to varying success.

Perhaps there's an analysis of this situation that looks at the low-interest-rate environment as one where groups attempted to use the 'free' cash to seize such a dominant position for themselves in hopes of being the primary rent-seeker once the music stops.

Actually that probably wouldn’t effect inflation. It would boost real growth. But the fed would likely still target 2% inflation so it would just cause them to ease more while trying to hit 2%.

There was comparable excess in the 80s and 90s despite even higher interest rates than now. The greatest asset bubble ever, the late 90s tech boom, was against a backdrop of 5-6% interest rates. High interest rates do not change things much. Yeah, 4% interest rates makes cash more attractive, but this is not going to stop huge tech companies from generating record profits. nor will it stop speculation.

The argument that "interest rates don't matter because counterexamples" ignores that it's very plain and obvious that they do matter right now in the U.S. markets.

A few weeks ago JPow gave a slightly less hawkish speech than normal at Jackson Hole and the Nasdaq rallied 6% in a single day. That is not a normal move. That level of upward move is something that only happens every few years on average, and yet it happened on a relatively mundane speech. More recently, JPM was calling for a move up to 10% depending on if inflation came in high or low (with the implication that this would affect the Fed's decisions on rates). This is not normal.

Right now, the U.S. market is moved primarily by interest rate expectations. It's all a punt on whether the free money will come back again.

In case anyone is still following along, the Nasdaq is down 2.5% today because of strong economic data. Why? Because the strong data means a higher chance of the Fed raising rates.

Why isn’t it normal?

First the moves are outsides because of all the algos and vol targeting type funds out there. Their the main cause of excessive scale.

Why shouldn’t real economic data line inflation rates have significant effects on stocks prices?

And on the other side, there's all sorts of evidence of other countries & currencies which also set 0% interest rates, that didn't experience any of the same kind of supposed wealth effects / asset bubble frenzy. 'Cheap money' is an attractive concept for building narrative explanations, but there just isn't such a slam dunk case for interest rate policy impact.

yeah you're right. like Japan , the EU, etc.

Am I missing some level of irony or does this comment claim that there aren’t asset bubbles in the EU?

What asset bubbles are in Europe? I don’t even think asset bubbles exists for the most part. There just some guy saying they think the price of something is wrong and claiming there some intellectual bubble spot. And once every 10-16 years a guy whose made a 100 bubble calls gets one right and then he gets to go cnbc for the next decade as the guy who got it right but was just a perma bear who saw bubbles every where.

Real estate?

Why?

The prices in every major city in the EU have gone insane.

Why does that mean bubble?

More comments

FTX had pension funds as major equity investors. That doesn't happen in a world where you can get investment-grade bonds that yield 7%.

madoff's fund had major inflows in the 90s despite even higher interest rates . Its real return was only 3% yet this was enough to attract billions

He made real 3% with almost no volatility, that's like having a financial cheat code.

He did have a financial cheat code, to be fair ...

I'd argue the Fed started getting very interested in asset prices starting with the 1987 crash.

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