Now You Xi Me
"Peekaboo grasshopper, a cute bug it is." by Fleeting Times by YJ is licensed under CC BY-ND 2.0.
This week, a jam-packed news cycle pushes MWI Weekly to a new day and time, with plenty to show for it.
Well, this has certainly been a week. There was almost too much news to absorb. And we haven’t even gotten to the truly dramatic stuff yet – although it seems we’re about to: Trump Says He Will Be Arrested Tuesday (voanews.com)
In any event, we delayed putting this newsletter together for as long as we dared in anticipation of further developments, and we weren’t disappointed. It meant leaking into Saturday instead of our usual Friday evening delivery, but that’s okay. Given this past week’s developments, especially in the world of banking and finance, it’s going to be a working weekend in much of the world anyway. Just about everyone in every field has something on their plate.
So, we’re alright with being a day late this time. As a matter of fact, our data suggest most people are opening these newsletters on Saturdays anyway. (And given the fact this year St. Patrick’s Day fell on a Friday night, we have the sneaking suspicion this week it’s going to be late on Saturday for some people.)
Since we post the latest edition to our website and social media and publish it in The National Gazette on Saturdays, we've been thinking about doing the email distribution on the same day as well. That way we can schedule everything to go out together -- on Saturday, mid-morning East Coast time. It’s a little more convenient from a production standpoint. Should the numbers hold up this week we’ll make the change for next week and try it out.
Now, with that being said, let’s get to it.
Now You Xi Me
The deepening ties between Russia and China would be troubling enough in and of themselves, considering how much they echo the alignment of the First Cold War: the democratic West vs. the authoritarian Communist Bloc. But today, as we have arguably entered the early stages of a Second Cold War, the situation is infinitely more complicated.
For one thing, the economic relationships between China and the West dwarf anything the old Soviet Union (or Maoist China, for that matter) ever enjoyed. Even as the Chinese glower at Taiwan, their biggest private employer and largest private exporter is Foxconn, a Taiwanese company. And that’s just one example; there are many more, thanks to the Chinese insistence on joint ventures to gain entry into the Chinese market.
And while China is also the second-largest economy in the world in terms of nominal GDP, just as the Soviet Union was back in the day, it comes with an important twist: whereas about half of the USSR’s international trade was with the Eastern Bloc, in China’s case its trading profile is much more diversified. It’s fair to say there isn’t a region in the world where China has not developed important economic ties, especially when it comes to their ability to to export manufactures and capital goods.
All of which gives China and President Xi an appreciable amount of geopolitical leverage. Which they are clearly intent on using. Not only is Xi on his way to Moscow on Monday to meet directly with Putin, the visit comes on the heels of a Chinese-brokered diplomatic thaw between Iran and the Saudis. And lest anyone miss the message, Chinese Ministry of Foreign Affairs spokesperson Wang Wenbin put a fine point on it Friday:
“Currently, the world is entering a new period of turbulence and reform with the accelerated evolution of changes of the century. As permanent members of the U.N. Security Council and important major countries, the significance and impact of the China-Russia relations go far beyond the bilateral sphere.”
As the old saying goes, if someone shows you who they are, believe them.
So what can we expect of Xi’s visit? That’s a really good question. It could come to not much of anything other than reaffirming China’s commitment to keep buying Russian oil, help Russia to avoid international sanctions and maybe even surreptitiously slip the Russians some badly-needed military technology. In other words, business as usual with some good photo ops.
Or it could be something else. In his most recent statement on his invasion of Ukraine, celebrating the ninth anniversary of the supposedly-free Crimean reunification referendum, Putin zeroed in on Russia’s security concerns in Crimea. Given the fact anyone well-versed in the issues understands the role and prestige of the Black Sea Fleet and the importance of the Russian naval base at Sevastopol to their sense of national security, It’s at least possible he was laying down a marker at the urging of the Chinese -- creating an opening for China to make a broad proposal to Ukraine and Western Europe in order to play peacemaker: we can talk about the Donbas and the rest, but Sevastopol must remain Russian.
Whether any such proposal would even be considered by the Ukrainians doesn’t matter. They wouldn’t be the audience. And the proposal wouldn’t really be about peace to begin with. It would be about appealing to the isolationists in the United States and those in Europe who are starting to weary of the war and want to move past it. It would be about driving wedges into the cracks. It would be about the “accelerated evolution of changes” the authoritarians are so intent on producing. It would be about a weaker West.
After all, while they’ve exchanged places at the top of the class, Russia and China still largely use the same old textbook: what you cannot subvert, invade; and what you cannot invade, subvert. And make no mistake, both of them are still at it. Russia was openly up to their usual tricks in our November 2022 midterms, using social media to spread disinformation, undermine faith in the electoral process and stoke partisan conflict. Having identified a vulnerability, they’ll just keep hitting it.
China, if anything, has been even more determined, even as they’ve been a bit more subtle. The TikTok saga is just one example of a seemingly innocent product with potentially dangerous underlying aspects, from a national security perspective. It’s going to be interesting to hear directly from the company’s CEO in Congress next week, but his company is no outlier. The issues surrounding Huawei are well-documented. So are the many vulnerabilities of Lenovo computers. In their case, there are innocent explanations like greed or sloppiness, but more intentional malign motives cannot be ruled out.
For Huawei, the massive government subsidies they’ve enjoyed are just one of the reasons intelligence officials have been so suspicious. The numerous incidents of industrial espionage would alone invite scrutiny, including of the motives, and punishment as a matter of law and equity. And it’s fair to say the company could not possibly have grown as much as it has as quickly as it has without the direct involvement and support of the Chinese government and the Chinese Communist Party.
None of which would be as much of an issue were Beijing and the CCP less authoritarian and more transparent. Had China evolved into something at least approximating a liberal democracy -- as we may have too confidently expected it to do thanks to the influence of capitalism and the openness of the West -- we’d likely be talking about things like commercial competitiveness and fair trade instead of national security. And had Putin’s vision of the Russian Federation and Moscow’s role in the world been less feudal and expansionist, a different course would have put them, and us, in a different place now too.
But we are where we are. It’s a conflict between two opposing systems again. Capitalism may have, in a very real way, defeated communism, but it didn’t take long for the battle to shift to a new, and far more fundamental, ground: rights vs. might. Which means the actual conflict, including in Ukraine where real shooting is going on, is about legitimacy. And that is one conflict liberty cannot lose.
Canaries in a Coal Mine
Of course, for us here at home we’ve had a raft of challenging domestic news to contend with, all of it of our own making. (Being better doesn't mean being perfect, especially in a system such as ours where imperfection is a feature.) Much of our attention this week has been occupied by the continuing fallout from the failure of Silvergate Capital, Silicon Valley Bank (SVB) and – although this one is a little more complicated – Signature Bank. On the international front, the cracks deepened for Credit Suisse at the same time (more on that in a minute).
Each of these cases is different in one key aspect or another, but all of them can ultimately trace the cause of their immediate problems to rising interest rates. And that’s a problem.
You see, the Fed has a dual mandate under the law: essentially, to control inflation and to maximize employment. But really the first one is the main priority. And to control inflation, the Fed’s main weapon is to raise interest rates and slow the economy down. That usually means operating at cross purposes to the second half of the mandate, but in the Fed’s view (and it’s not at all unreasonable) inflation is the greater danger. They don’t really want to put people out of work, even less to create a recession, but they will if they have to.
But there’s a third mandate the Fed has to answer, even if it’s not codified into law: financial stability. It’s largely up to the Treasury Department and the regulatory agencies of the executive branch to make sure our financial system is functioning properly for businesses and consumers, but what the Fed does with interest rates can have enormous effects too. In simple terms banks “borrow short and lend long”: they pay short-term interest rates to depositors and then make long-term loans with the money and collect interest on the loans. When the interest they collect is more than the interest they pay out, they make money.
The system works fine when interest rates don’t change very much or very quickly (which is largely what we mean by “financial stability”). Healthy banks don’t have much trouble tweaking things here and there and staying profitable even in a normal rising rate environment. Even somewhat unhealthy banks can usually muddle through if they have enough time.
When things get a bit unusual and interest rates start to rise more rapidly, the situation gets a little tighter. In the case of the banks which hit the rocks in the past week and a half or so, they suffered a double or triple whammy: higher interest paid out on dwindling deposits, lower demand for financing at higher rates, and long-term bonds whose value declined just as the banks needed to sell them (I’m leaving out some details and the crypto thing entirely, but that’s the general picture).
Some banks, like Switzerland’s Credit Suisse, have been experiencing pretty profound difficulties for some time and just didn’t have the altitude to deal with the issues. Others, like Silvergate and Signature Bank here in the United States, had large exposures to the crypto industry which complicated matters even further. But essentially, all of the issues come from higher interest rates, and in one way or another they affect all of the banks. It’s just how the math works.
As it is, the crisis is a pretty small one, at least so far. The system hasn’t had too much trouble dealing with it. The authorities painted by the numbers and seized Silvergate, SVB and Signature, guaranteed all their depositors (which is a new wrinkle) and are in the process of winding them down in an orderly manner. First Republic, another bank with a growing problem on its hands, got a capital infusion from some friendly Wall Street execs, who no doubt got free checking and maybe a new toaster or something. The lifeline didn’t stop First Republic’s stock from taking another hammering on the last trading day of the week, but the balance sheet at least looks a lot better.
Across the Atlantic, UBS is contemplating picking up whatever pieces are left of Credit Suisse, which has been limping along for quite some time now after a string of scandals and mistakes. It would be a sad end to a once-proud name, perhaps. But that’s capitalism. In the grand scheme of things, a big fish swallowing a much smaller fish which is struggling to swim anyway isn’t the worst of all outcomes.
What would be a bad outcome is the discovery of a much larger problem than the one we see. Rising interest rates affect all debt, including the payments government has to make on the money it's already borrowed. Beyond a doubt, the Fed is more than aware of the problem. It’s not hard to imagine the sleepless nights of Fed chair Jay Powell as he wrestles with the question: are we at the Fed actually wearing a straitjacket we can’t feel yet?
It’s a question maybe no one can answer right now. But I keep going back to an interview Ben Melkman gave to Bloomberg a couple years ago, in August 2020. Melkman is a macro trader and looks at things through a trader’s perspective, but he had some pretty profound things to say about what lies ahead. It’s worth a half hour of your time to check it out -- and pay very close attention to what he says about the “harsh realities of deficit math” and what could happen once the authorities cure the problem of deflation (which was the issue pre-Covid):
Macro Trader Melkman Sees New Market Regime After Virus (Full Interview) - YouTube
He may be right. If he is, what we’re seeing right now isn’t so much an isolated banking crisis as a fiscal reckoning. The first banks to succumb might just be the weakest and most vulnerable without being particularly unique -- canaries in a coal mine, if you would. And what’s worse, the actual problem may run much, much deeper than the banking system alone.
It’s a theme we’ll return to in this space very, very soon. For now, keep in mind what Melkman says about nominal growth toward the end of the interview. As we often say when talking about climate change, the way out is up.
Odds and Ends
Boy howdy, where to even start. Normally as we put together this newsletter over the course of a week we end up with something like 10-15 stories to choose from for Odds and Ends. This week we have over 40 on the list. It was quite an eventful week -- and it may just be a prelude.
Maybe a good place to start is with a piece from the Gazette which lays out Whig thought on some of the key attributes of a successful society:
The Seven Attributes - by The Modern Whig Institute (substack.com)
They’re worth keeping in mind as we head into what is sure to be a dramatic stretch of our nation’s history. The next 18 months are sure to be . . . something. And we know just where to begin:
Trump attorney ordered to testify in documents case, reports say | Reuters
Kind of forgot about that one, didn’t you. While the immediate focus is on Trump’s troubles in the New York hush money case, his real problems are closer to home. As in, right there inside his home.
Meanwhile, the current most viable challenger to Trump’s grip on the Republican Party may have stepped in it last Monday:
Ron DeSantis says protecting Ukraine is not a 'vital' U.S. interest (nbcnews.com)
While MAGA Land hailed him, old school conservatives and mainstream Reagan Republicans were, shall we say, not so pleased. But as luck would have it, events the rest of the week quickly overtook the DeSantis statement and he likely won’t pay any price for it, at least for now. But come the primaries and the debates -- will orange be the new black by then? -- you can be sure it will come up.
While we’re on the subject of Russia, their *cough cough* president has some legal troubles of his own:
Russia doesn’t recognize the ICC and there’s no way for them to nab Putin anyway, at least as long as he avoids setting foot in the wrong country. But one never knows how these things will ultimately work out. No one thought Slobodan Milosevic would ever be brought to justice, but he was. And no one thought the war crimes in Kosovo would ever be prosecuted either, but a dogged lawyer by the name of Jack Smith thought differently.
Things really piled up as the week went on, including in the theater of the absurd. For example, according to Mexico’s president, we can solve our illicit drug crisis if we really want to:
Lack of hugs caused US fentanyl crisis, Mexico's leader says | AP News
Maybe he’ll airdrop us stuffed animals or something.
Of course, we may not be all that far from being rescued by our robot overlords:
Humanoid robots are coming (axios.com) + GPT-4 (openai.com) = I ROBOT (Blu Ray) Car Scene (VO) - YouTube
And if we don’t get ourselves, maybe Mother Nature will do the job for us. With, of all things, massive plumes of seaweed:
Sargassum seaweed blob heading to Florida explained | CNN
Well, it likely won’t kill us. But it could ruin some vacations.
Purging history can ruin us in some other ways. After all, if we don’t know history we’re condemned to repeat it (one could argue we’re condemned to repeat it anyway, but whatever). As we’ve mentioned many times, the key to clear thinking is the ability to make distinctions. And that includes distinguishing between remembrance and endorsement:
Backlash hits Audubon after refusal to drop slave-holder's name - POLITICO
The Culture War cuts both ways, though. Sometimes with some pretty funny results:
Was One of Brigham Young's Sons a Drag Queen? | Snopes.com
For light she hated as the deadly bale,
Ay wont in desert darknesse to remaine,
Where plaine none might her see, nor she see any plaine.
-- Edmund Spenser, The Faerie Queene: Book I, Canto I
And with that, we’ll call this a wrap. If we keep going through our bookmarks we’ll be here until Monday.
Remember, our next MWI Weekly will go out over the wires mid-morning Eastern Daylight Time on Saturday, March 25 rather than late evening on Friday, March 24. If all works out, we’ll keep the Saturday morning schedule going forward. Maybe we’ll even add some cartoons.
See you next week.
Kevin J. Rogers is the executive director of the Modern Whig Institute. He can be reached at director@modernwhig.org.
The Modern Whig Institute is a 501(c)(3) civic research and education foundation dedicated to promoting the fundamental American principles of representative government, ordered liberty, capitalism, due process and the rule of law.
To join the Institute, click here.
