Rabobank: Is Biden Retreating From A Clash With China… Or Doubling Down

By Michael Every of Rabobank

Power abhors a vacuum

There’s an old phrase that neoliberal economists pay virtually no attention to at all, and which is one of the largest problems with the discipline: power abhors a vacuum.

None other than Adam Smith himself stated “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” You don’t hear too much of that echoed when it comes to regulatory action; and less so as globalization has made the largest firms even larger. ‘Leviathan’, indeed. Smith also added “The government of an exclusive company of merchants is, perhaps, the worst of all governments for any country whatever”. You don’t hear too much of that from economists talking about election (or lack of election) results in places where “business-friendly” candidates win. Quite the opposite.

In short, Smith was passionately interested in far more than just the efficiency of pin-making – he understood power in general, not just the power of markets. By contrast, neoliberal economists who claims to follow Smith have long tried to focus just on ‘pin-making’ and not underlying power – while theoretically justifying this by counting how many hypothetical angels can fit on the head of a pin. In particular, this was done by rolling the classical economic conception of ‘rent’ into ‘capital’, leaving ‘labor’ to struggle against both in one. ‘Leviathan’ again.

For a purported science like economics, to overlook the structure of the society in which it operates makes us much sense as for physics to fold one of the three states of matter (gas, liquid, solid) into one of the others ‘to simplify things’. Indeed, that’s a metaphor that fits markets beautifully today. Rolling the liquid into the solid sums up how our central banks are working; rolling liquid into a gas makes markets all Jumpin’ Jack Flash; and for those left outside the winners’ circle, all that is solid melts into air. If you don’t know who said that then, congratulations, you really are a neoliberal economist! 

More pointedly, such fundamental taxonomy matters. Especially when it comes to matters like taxes. When one hears US Treasury Secretary Yellen talking about ‘labor vs. capital’, is she talking about labor vs. businesses, or labor vs. rent-seekers? Surely the policy response required depends on an understanding of these underlying issues – yet I don’t hear any Fed speakers addressing such conceptual points. Regardless, the same economic thinkers ironically seem willing to leap from pin-making and pinheads-and-angels to the very deepest of societal and global problems embedded in the genuine need to Build Back Better – through which there must be questions of power and legitimacy involved. One has to wonder how much of this is accidental and how much is deliberate oversight – which I put to you would be exactly how Adam Smith would put it to you himself if he were alive today.

The latest Fed-speak was far more prosaic for once: QE tapering will happen before rate hikes, says Powell (no, really?!), while the Beige Book noted: “Prices accelerated slightly since the last report, with many Districts reporting moderate price increases and some saying prices rose more robustly.”; and “Employment expectations were generally bullish. Wage growth accelerated slightly overall, with more significant wage pressures in industries like manufacturing and construction where finding and retaining workers was particularly difficult. Some contacts mentioned raising starting pay and offering signing bonuses to attract and retain employees.”

Moving on, I was struck by the timing of two stories yesterday: the death of Ponzi schemer Bernie Madoff in prison, and a cryptocurrency-related IPO. Before Madoff was less than zero, he was a market hero. Before his near-USD65bn “one big lie” was uncovered, he provided outsized returns. Nobody in power tried to dig into the fundamentals of how. By contrast, cryptocurrency appeals to people who do question, and who are interested in the ideas of power. However, that does not give them any power against such structures; and, yes, there are always going to be the less scrupulous among them too, and those who don’t ask questions and just chase outsized returns.

Power of course relates to geopolitics too. Yes, I know the same threads are here almost every day now. Send an email to DC, Beijing, Moscow, or Tehran to express one’s frustration with that if you wish – see how much impact it will have (which is an object lesson in power). The latest is that:

• Iran has warned the US that there is “not much time” and “no alternative” other than to grant it all it demands: that as uranium enrichment hits 60% and even the EU starts to feel the resultant heat. The pattern so far appears to be that it isn’t Iran who blinks;
• The US is finally to exit Afghanistan in September, ending a 20-year war that leaves the country largely in the hands of the Taliban. Is that a warning for those thinking about US military action against Iran?; and
• US ships are arriving in the Black Sea as the Russia-Ukraine stand-off continues. However, as the BBC reports, the Russian view is that the White House’s recent offer of a summit represents America blinking and recognition the US is not prepared to fight. Which is positive, but would represent three US blinks in a row.

This raises a key question if so: is the US doing it because it is going to also retreat from a potential clash with China,…or to allow a greater US focus against China? Given the US appears to be deepening ties with Taiwan rapidly, with ex-US officials being sent to Taipei; there are reports the US is pushing Japan to stand alongside it in a pro-Taiwan statement; and China is carrying out live-fire exercises around Taiwan, then the better bet would arguably be that any US retreat elsewhere is indeed tactical, and aimed towards new focus on the Pacific.

If so, that in turn implies two things. First, hopes for greater calm near term – but a huge underlying increase in geopolitical tensions around obvious geographical flashpoints that are going to become harder and harder for either side to step back from. Second, and ironically, more space for the likes of Russia and Iran to act at the margin, knowing the US cannot handle a fight with them and the challenge of China. Which does not then imply calm near term for those nearby, as we already see in the Middle East.

As I started with, even if neoliberal economist abhor seeing it, power abhors a vacuum.