Geopolitical Market Forces

New Jersey isn’t all Chris Christie and Snooki and Bruce Springsteen, and it’s not one long episode of The Sopranos there, everywhere, every single day, in spite of the gleeful thuggery of Christie’s crew in Trenton, which he says he didn’t really notice until it was too late, if you believe that – and you’d better believe that or he’ll punch you in the face. That, and nasty Newark, are only nine tenths of what New Jersey is all about. There’s the other one tenth – Paul Fussell and the Elizabeth Warren teaching at Rutgers, and Albert Einstein deciding the place to settle down and think big thoughts really ought to be leafy and serene Princeton University, in the absurdly perfect college town of Princeton, New Jersey. The place even looks like a movie set – and he loved it there. The university also loved having him there, for obvious reasons – there was only one Einstein. Take THAT, Harvard! They did not, however, anticipate him getting playful. Einstein soon developed a habit of dropping sly aphorisms into weighty conversations, and since few really understand what he was getting at with his talk of space and time and special relativity, everyone else remembers the quips, like his quick dictum that everything should be made as simple as possible, but not simpler. That was probably said to quiet some rather dense person who just didn’t get the relationship of mass to light and time and wanted a simple explanation even a four-year-old could understand. Yeah, well, it doesn’t work that way. Some things just aren’t simple.

Forget that man’s Special Theory of Relativity, superseding his General Theory of Relativity – someone had to say that yes, everything should be made as simple as possible, but not simpler, unless you want meaningless nonsense. Republicans need to be reminded of that, often, because their insistence on small government, or virtually no government, and laissez-faire capitalism, where the market determines what’s worth doing and what’s not, takes what Adam Smith said long ago, about the Invisible Hand of Competition fixing everything, to places Adam Smith wasn’t willing to go. Smith thought competition was pretty cool, and governments could get in the way of economic progress, but he never went so far as to say it would be best to get rid of government entirely because an unregulated free market would create paradise here on earth. Along with discussing the wondrous efficiency of competition, that Invisible Hand that magically makes everything better for everyone, he offered a rather extensive list of what governments ought to do – collect taxes to build infrastructure, and to run public schools, for everyone, and to provide a police force to keep the peace, and to regulate corporations and curb monopolies, and to do things to assure that the people are healthy, as the prevention of “leprosy or any other loathsome and offensive disease” from spreading among the population might be a good idea. In Smith’s view, none of this should be privatized, but somehow our current crop of Republicans have decided that Smith should be made as simple as possible – privatize it all – if it makes money for someone, it should be done, and if it doesn’t, it shouldn’t be done. That’s real freedom, and a totally free market fixes everything, always – but that makes things simpler than possible, as Adam Smith carefully explained. Of course any four-year-old can understand the simple concept being stated – government bad and personal freedom good – but that’s meaningless nonsense.

That’s fairly obvious. Americans will fight tooth and claw to keep their Social Security and Medicare, and think public roads and bridges are rather useful, and some still somehow think public schools are a good thing, and no one is making big bucks there. Attempts to privatize those have failed again and again, but to be fair, sometimes the market speaks clearly, ridding us of crap we were told was wonderful. The Ford Edsel comes to mind, and in 1985, the “New Coke” lasted all of six months or so. The markets spoke. Adam Smith’s Invisible Hand did what he said it would do – make things better for everyone. That’s not to say the immensely successful Justin Bieber is a wonderful talent and a wonderful person, but the market works most of the time.

They may even work geopolitically, and they actually may take care of our problems with Vladimir Putin. At least that’s what Jason Karaian argued on Monday at Quartz:

Strongly worded statements, threats of travel restrictions, and summit no-shows… So far, these are the relatively mild diplomatic implications for Russia of its incursion into Ukraine, as few in the West can stomach an open military confrontation with Moscow over its apparent occupation of Crimea.

But the markets are punishing Russia much more swiftly than the diplomats. A wide range of Russian assets – stocks, bonds, and the ruble – plunged in value today. To shore up the ruble, which is plumbing record depths, Russia’s central bank unexpectedly hiked interest rates today. It ratcheted up the benchmark one-week rate from 5.5% to 7%, and traders report that the central bank has also been spending billions of dollars in currency markets to stem the fall in the value of the ruble….

Karaian explains that Russia finally reined in their double-digit inflation, but an extended fall in the value of the ruble could bring that back, fast, and they’d be in a world of hurt again. Who needs diplomacy, or war, when market forces are what really matters here? The Invisible Hand strikes again:

And so, perhaps for the first time since unrest broke out in Ukraine, Putin may be finding that his actions have costs – not the costs that world leaders threaten to impose in vague communiques, but the pain that results from thousands of nameless, faceless transactions in stock, bond, and currency markets as investors flee the uncertainty and instability sown by Moscow’s unpredictable intentions in Ukraine. These are attacks that cannot be repelled by troops and tanks, but the damage they cause is every bit as real.

The markets spoke, but they also spoke here:

The escalating crisis in Ukraine created turmoil in global markets on Monday, hitting stocks from Wall Street to Ukraine and causing a spike in oil and natural gas prices that could reach into consumers’ wallets.

But despite fears that the conflict between Russia and the West over Ukraine could shift into a military confrontation, analysts said there was little risk of global financial contagion or of major blowback to Western economies.

“If this turns into an outright war, it will be a different story,” said Holger Schmieding, chief economist at the private bank Berenberg in London. “More likely it will remain a Cold War-style standoff, and if that’s the case the economic damage for the West and the global economy will be limited.”

Still, the growing crisis in Ukraine is unsettling investors, who have already been nervous about shaky emerging-market economies.

Yeah, there was a massive sell-off on Wall Street – everything is interconnected these days – but then there was an even bigger rebound:

U.S. stocks rallied on Tuesday, with the S&P 500 closing at a record as concerns about a confrontation between Russia and Ukraine eased, and the market recovered more than all of the previous session’s hefty losses.

President Vladimir Putin delivered a robust defense of Russia’s actions in Crimea on Tuesday, saying he would use force in Ukraine only as a last resort. His comments relieved investors’ fears that East-West tension over the former Soviet republic could lead to war.

The day’s gains followed Wall Street’s worst day in a month, when investors sold stocks and other risky assets as tensions escalated between Ukraine and Russia. Global stocks rebounded on Tuesday while gold, the Japanese yen, and Treasuries prices fell. Crude oil prices, up more than 2 percent on Monday, reversed some of that session’s gain in trading on Tuesday.

It was a little more detailed than that:

Russian President Vladimir Putin on Tuesday denied sending members of his military into Crimea or that any of the up to 25,000 Russian troops already stationed in the country had any role in the standoff, according to the state-run RIA Novosti news agency. He insisted his military isn’t planning to seize the Crimean peninsula – but didn’t close the door on action “to protect local people.”

Should Russian troops intervene, Putin said, “It will be legitimate and correspond to international law because we have a direct request from a legitimate president and it corresponds to our interests in protecting people who are close to us.”

He was backing down, as best he could. After all, Ford did keep insisting the Edsel was a wonderful car, and everyone wanted one. This was the same sort of thing, modified bluster, in response to the judgment of market forces telling him he was selling what folks saw as pure crap. It’s just that modified bluster is hard to pull off. Angela Merkel had already told Barack Obama that Putin had kind of lost it – he was on a different planet, and Julia Ioffe confirms that in her summary of Putin’s televised press conference that somehow calmed the markets:

Slouching in a fancy chair in front of a dozen reporters, Putin squirmed and rambled. And rambled and rambled. He was a rainbow of emotion: Serious! Angry! Bemused! Flustered! Confused! So confused! Victor Yanukovych is still the acting president of Ukraine, but he can’t talk to Ukraine because Ukraine has no president. Ukraine needs elections, but you can’t have elections because there is already a president. And no elections will be valid given that there is terrorism in the streets of Ukraine. And how are you going to let just anyone run for president? What if some nationalist punk just pops out like a jack-in-the-box? An anti-Semite? …

The American political technologists they did their work well. And this isn’t the first time they’ve done this in Ukraine, no. Sometimes, I get the feeling that these people… these people in America. They are sitting there, in their laboratory, and doing experiments, like on rats. You’re not listening to me. I’ve already said, that yesterday, I met with three colleagues. Colleagues, you’re not listening. It’s not that Yanukovych said he’s not going to sign the agreement with Europe. What he said was that, based on the content of the agreement, having examined it, he did not like it. We have problems. We have a lot of problems in Russia. But they’re not as bad as in Ukraine. The Secretary of State. Well. The Secretary of State is not the ultimate authority, is he?

And so on, for about an hour. And much of that, by the way, is direct quotes.

Ioffe isn’t alone – The Guardian described Putin’s remarks as “impromptu and occasionally rambling” and The New York Times said he was “clearly furious” and Adam Taylor at the Washington Post called it “a series of half-truths, circular reasoning, and bravado.” But how do you defend an Edsel? And it got even more interesting:

Secretary of State John Kerry held a press conference in Kiev on Tuesday after he had toured the areas where anti-government protesters were killed in recent weeks and meeting with members of the provisional Ukrainian government. While taking a question from NBC News reporter Andrea Mitchell, Kerry appeared shocked when she informed him that Russian President Vladimir Putin had insisted earlier that no Russian troops were present in Crimea outside Russia’s bases.

“U.S. officials have been saying that Vladimir Putin will be isolated by his actions, yet today he seemed defiant,” Mitchell began. “He denied that there were any Russian troops in Crimea – occupying Crimea.”

“He really denied there were troops in Crimea?” Kerry interjected.

“Yes he did,” she replied. “He also blamed the crisis on the United States.” She said that Putin shows no signs of withdrawing from Crimea and asked how U.S. pressure is working.

Kerry responded to this question by identifying the political figures he has met with in Ukraine and by praising the provisional government’s restraint.

In short, he had no idea how to deal with this, but the markets had already spoken. The product was being withdrawn. It was defective, and Ioffe explains why:

For the last few years, it has become something like conventional knowledge in Moscow journalistic circles that Putin was no longer getting good information, that he was surrounded by yes-men who created for him a parallel informational universe. “They’re beginning to believe their own propaganda,” Gleb Pavlovsky told me when I was in Moscow in December. Pavlovsky had been a close advisor to the early Putin, helping him win his first presidential election in 2000. (When, in 2011, Putin decided to return for a third term as president, Pavlovsky declared the old Putin dead.) And still, it wasn’t fully vetted information. “We were like astronomers, studying refractions of light that reached us from great distances, and used them to draw our conclusions.”

That’s a bit dangerous, and Vladimir Putin did say this – “Our major concern is the orgy of nationalists, and extremists and anti-Semites on the streets of Kiev” – and at Fox News, here, there’s endless talk of the current epidemic of gangs of young black men randomly beating white men to death, everywhere, almost every day. Yeah, it’s that Knockout Game – which isn’t happening anywhere at all, except in a parallel informational universe. Vladimir Putin seems to have his own personal Roger Ailes.

Not that what we’ve been saying makes much sense, as James Mann discusses here:

The administration loves to brand actions it doesn’t like as relics of the past. “It’s really nineteenth century behavior in the twenty-first century,” Kerry said of Putin’s Crimean gambit. A senior administration official who sounded like either National Security Advisor Susan Rice or Ben Rhodes told reporters on background, “What we see here are distinctly nineteenth- and twenty-first century decisions made by President Putin to address problems.”

Well, to start with, by definition Putin’s decisions are taking place in the twenty-first century. The administration here seems to be using the centuries like a teacher handing out a grade: twenty-first century is an A, twentieth century is a C, nineteenth century is an F. More importantly, talking this way raises an uncomfortable question: Does the reality of the twenty-first century conform to what Obama administration officials think it is?

Dmitri K. Simes is even more exasperated:

We are speaking very loudly. We are carrying a small stick. We are not really disciplining the Russians. We are not clearly defining what is important to us. We are acting like King Lear. We are issuing pathetic declarations which nobody is taking seriously.

When I saw Secretary Kerry on television yesterday, I think it was a very sad performance. He was visibly angry. He was visibly defensive. He was accusing Russians using very harsh language of violations of international law. His description of the political process in Ukraine which led to this situation was incomplete and disingenuous at best. And then, after he said all of these things, he did not say, “Well, because of the Russians violating international law, threatening international security, that because of that the President of the United States is moving our naval assets in the Black Sea!” With the language he was using, that’s what you would expect him to do. But he was carrying a small stick.

Rhetoric is not policy and sounding tough doesn’t roll back Russia’s advances. The administration will have to do something that does not come naturally to it: think strategically. This means taking steps, preferably quietly, to demonstrate our commitment to the security of the Baltic States. It means considering strengthening the Ukrainian military if the conflict escalates. But it also means avoiding empty public threats, respecting Russia’s dignity and avoiding creating an impression that it’s our way or the highway.

Well, we’re selling a product too, and Slate’s Fred Kaplan speaks to that:

Here are the real lessons of the crisis in Ukraine: Russia is not a great power, and Vladimir Putin is hardly the master grand strategist that many American Cold Warriors have been weirdly eager to believe.

Or these should be the lessons that Western leaders take away and broadcast to the world. I’ve been disturbed by the Obama administration’s rhetorical response these past few days – the drumbeat that Putin is on “the wrong side of history” and that his actions will bear “costs” and “consequences” – because it’s the sort of rhetoric that can’t be meaningfully translated into action. History is not some Hegelian juggernaut arcing toward destiny, and to believe otherwise is to overestimate the force of righteous words and a little nudging. (Syrian President Bashar al-Assad was said to be on the wrong side of history, yet somehow he’s still around.) As for that nudging, there are no consequences – none that Obama or European leaders could credibly threaten that would keep Putin (or any other Russian leader) from doing whatever it took to hang on to Ukraine.

It’s time for modesty:

The primary goal is, or should be, to make things right in Ukraine: to stabilize its economy, assure its territorial integrity, and ensure free and fair elections in May. A subset of this goal is to do all this, if possible, with Russia’s cooperation.

And it’s also time for realism:

Two things have to be kept in mind. First, for any Russian leader in history, Ukraine is vital: as a leading market, supplier, and buffer to Western encroachment. Second, Putin really views the protests in Ukraine as the product of a Western plot to wrest the country away from Russia’s orbit. He’s wrong, but everything in his background leads him to see conspiracies, and he would have found it “no coincidence, comrades,” that the initial demonstrators in Kiev were protesting then-President Viktor Yanukovych’s retreat from a closer relationship with the European Union.

That’s a bother, but there is a way out of this mess:

The answer – maybe the only answer, the only way out of this crisis- lies in the upcoming elections. Let the Ukrainian people decide which way they want to go. Russia-leaning candidates will run – maybe one of them will even win. Certainly there’s no guarantee that the winner – or a majority of the Ukrainian people – will want to embrace the West exclusively.

A case can be made that Putin committed a huge strategic blunder in this crisis. Had he simply stood by and waited for the elections – had he used Ukrainian proxies to clamp down on the more militant protesters rather than send black-masked storm troopers to occupy the Crimean peninsula (which is under de facto Russian control and populated largely by Russian loyalists) – he probably would have won in the end. The Western nations, assured of the allegiances to democratic forms, would have backed away. Ukraine would still need Russian aid and trade to survive. Even with some movement by Ukraine toward the EU, Moscow would retain its dominance.

But that’s not what he did so we are where we are, until the elections – unless we simply let the markets speak. Forget sanctions – the Europeans will never agrees to those, because they’d hurt Europe just as much as they’d hurt Russia – and forget what Putin is saying. Markel was right. The man is not on this planet. As for what we’ve been saying, some of it sanctimonious, some of it belligerent, some of it conciliatory, that only confuses matters, and this is one of those few times that Invisible Hand might actually be useful. Putin has a new product. Let’s see if anyone is buying it. It’s simple, really, but not that simple.

About Alan

The editor is a former systems manager for a large California-based HMO, and a former senior systems manager for Northrop, Hughes-Raytheon, Computer Sciences Corporation, Perot Systems and other such organizations. One position was managing the financial and payroll systems for a large hospital chain. And somewhere in there was a two-year stint in Canada running the systems shop at a General Motors locomotive factory - in London, Ontario. That explains Canadian matters scattered through these pages. Otherwise, think large-scale HR, payroll, financial and manufacturing systems. A résumé is available if you wish. The editor has a graduate degree in Eighteenth-Century British Literature from Duke University where he was a National Woodrow Wilson Fellow, and taught English and music in upstate New York in the seventies, and then in the early eighties moved to California and left teaching. The editor currently resides in Hollywood California, a block north of the Sunset Strip.
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