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Here is what Wiki has to say on itShock therapy (economics) - WikipediaSince the relevant text is kinda short, lets paste it hereProminent economist Josef Stiglitz ties all these ideas together to explain the reason why shock therapy failed in Russia.Through the idea of property rights, Glitzy uses the idea of Adam Smith's invisible hand to explain that, in the presence of severe corruption, a lack of institutionalized law and order and artificially depressed exchange rates, the free market created by shock therapy in Russia created a race to the bottom to asset strip the country and remove the capital abroad, rather than the mutually beneficial race to control the market in commodities that would otherwise happen. Competition meant that if the nominal owner of the capital didn't asset strip the capital first, someone else would.To summirize, Jofes Stiglitz got **** for brains, as can be expected of any academic “economist” equipped with the quasi-Nobel of theirs. Specifically.a) The shock therapy methodology did not fail in Russia. It failed everywhere they tried it, each and every time. A few countries recovered eventually, but that was dispute this cure, not because of it.b) There is no invisible hand. Adam Smith died in 1790 and it is time to invent something new. A perfectly free market is that for milk, modeled byPerfect competition - Wikipediain such a market, nobody makes any profit. This leads to drive the heck away from this situation and towards a monopoly, perfect competition’s polar opposite extreme which does have some redeeming values. Especially so if the monopoly is yours, but not only. Thus you can observe pretty much every important, high value add business to settle into a small and cozy oligopoly / cartel that stops just short of running afoul of antitrust. Think Intel and AMD, Boeing and Airbus, OPEC and OPEC+, Ma Bell and some other kind of AT&T. You get the idea. And, what are gonna do about it?The purpose of a free and open market is supposed to be something called price discovery. That, it doesn’t really do so well. One reason is that there is no upper bound on time the market takes to settle. This is why all the equity and commodity markets that are not OTC, like an actual exchange, are “managed” This means the price is determined by a specially designated entity called the “market maker”, a localized monopoly, however they see fit. For example, the dude who sits on a high pulpit on the NYSE floor is just that (market makers are called “specialists” or spec for NYSE) The rest of the people running around with notepads and making noise are decorative, don’t do anything useful anymore.Even if the “free” or ad hoc “managed” market does settle, it is not necessarily in a Pareto-optimal arrangement. That is, you can pick up a whole bunch of historical trade data for limit orders for some period and have a computer find a different arrangement of the same collection of buyers and sellers such that everybody is just as satisfied, but the total trade volume for the most optimal arrangement is much higher. Like the DJIA index could’ve been much higher than it actually turned out to be. Moreover, there is a strong disincentive in this setup for the significant players to share their price and volume information with others, which was the rationale for having public exchanges to start with (that be most efficient dissemination of price and volume data to all participants. not that a public exchange existed anymore. all that’s left is private corporations dealing in their own equities with the rest of them)These sort of conflicts of interests leads to phenomenon of “dark liquidity” pools and inevitable leads to elements of Soviet-style central planning being re-invented. I digress.c) Artificially depressed exchange rates. The Soviet ruble was not artificially depressed! This observable was based on the exchange rate of cash ruble, which the Soviet consumers could use to purchase consumer goods. This was, however, only a small fraction of monetary base, maybe correspondent to “money measure M1” in modern econ parlance. Most of the ruble existed in a form of “accounting ruble” that could only be used for clearing between juridical persons. This was most of it.Of course, the disadvantage in providing consumer goods available to regular consumer was more severe compared to the West than industrial stuff corporate entities might be interested in. The same sort of disparity is evident in a way US government compiles its stats. Unlike everybody else’s PPP adjustment, there is the CPI for consumer price adjustment and PPI for corporations. Same as dollars one may cash and accounting dollars that only exist on some balance sheet.Other examples of purely accounting money that may not be cashed would be IMF’s own SDR, which is a weighted basked of known reserve currencies, but is not available to entities that are not central banks. Still with me?Lets try a more complicated example, the ECU, the European currency before there was euro cash. (in its infinite wisdom, the European Commission just had to take such a whimsical name as ecu, which is also the name of ancient French gold coin, to some scruffy Australian macropod. see Common wallaroo - Wikipedia) However, the two currencies never quite became the same. One reason is that the European Union has pre-financed the rollout of cash euro by issuing a whole bunch of debt denominated in US dollars. SeeTalk:Eurodollar - WikipediaThis appears to be more of a curse than a blessing these days. If you are dealing in fixed income, a good way to compare is to use US government bonds once issued by US treasury in German DM and Swiss Franc nominal, aka theCarter bonds - WikipediaSome of those should still be should be around. I think that you will find out that the consumer euro is also depressed compared to accounting euro going back to ECU (because Bulgaria and Co) Caveat. The EU, being the crypto-German Reich that you always suspected it to be, has gone slightlyAldi - WikipediaThis means there two distinct regions to it, Euro-Nord and Euro-SudThe prestigious Norky region is made out of countries that always had disciplined fiscal policy. That is, the budget is around break-even inflation negligible. What is the point of doing it? It is quite richtig - Wiktionary. If this argument does not work for you, you are obviously not with the master race and belong with the undesirable southerners. Who includeGreece (who the Germans know how to squeeze), but most annoyingly Italy, Spain and France, all major economies that they cannot. Traditionally, those used to run the budget in entirely nicht richtig fashion, where a popular signor primo ministro needs to gives out freebies to the populace to stay afloat. This causes a massive budget deficit which turns into a major inflation, which becomes the problem of the next primo ministro. Problem solved! It is very difficult to convince the ScheißSpaghettifresser, who practically invented the modern double-entry accounting as well as all kinds of ways to beat it, about the importance of richtig, So, there is now a single cash EUR, but two different accounting EUR baskets for banks, to be settled by the BIS in Basel. This causes funny side-effects, like an appearance of very major Spanish bank called Santander Consumer here in Austria, which proceeded to finance purchases of junk with interest rate equal 0%. Interest-free for real (which means -inflation rate%, or more correctly, local inflation rate-real inflation rate in Spain). Their website advertises a rate “as little as 3.25%” for regular cash credit, which actually turns out to be 7.5% for me after all the small print. What do we learn? No-one expects the Spanish Inquisition, not even the Basel dwarfs. I digressed.What does any of this have to do with asset stripping during Soviet to Russian economic transition? Well, the problem was that it actually went in reverse! During Soviet times, all the foreign trade went through a designated government ministry and a network of Soviet trade representations. The calculation of the cash ruble base was comparatively trivial. Exactly as much was issued as there were available goods in the country. Now, with the free market reforms, various juridical persons started to trade with foreigners direct. This had the effect of flooding the country with strange cash, ie indirectly massively increasing the supply of cash ruble coming from the stocks of previously industry-only, accounting ruble, which became the really depressed variety. The consumer cash ruble, thus became massively INFLATED in its purchasing power, causing massive shortages of every conceivable consumer good across the board. Not much of asset stripping, but a broken form of foreign direct investment instead.Lets try to device a suitable folksy PPP scheme to account for this. Kinda like Economist burger, but different. How about this?vs. theseThose are what they call aPalladium coin - WikipediaOne is an American Palladium Eagle of $25 nominal they are minting from 2017 on. Another a Soviet 25 ruble coin from 1989. You can easily see the first coin fetching around $2800 on EBay and the Soviet about $1400, or pretty close to its worth in metal. Both coins are exactly one troy ounce of fine palladium, so we’ll attribute the extra worth of the American eagle to numismatic value alone. Because not only those two the same weight in palladium, but officially the same currency. Currency code XPD via ISO 4217. Now, that seems about right.For example, because the later daysEconomy of the Soviet Union - Wikipedia, anno 1990has been assessed as the world’s second largest, at about 1/2 the US (for extra numismatic value) Now, the Soviet yokels minted a lot of those coins, and actually gave them out for the 25 rubles nominal value. This tells us they were treating those as some kind of government bond. 25 rubles was a lot of money back when. A young engineer straight out of college would get a starting salary of 120 rubles a month. I just graduate high-school in 1990 and after a few years wasted in search of my true calling, ended up going to college in US. Which is obviously what makes me such an expert on them damn gringos,What does $25 nominal have to do with the worth of US coin? Nothing much, except for possibly imitation being a form flattery.It is much easier to compare this to the dollar before theNixon shock - Wikipediawhen the peg of troy ounce of gold to $35 was dropped. Given the currently very similar prices for gold vs. palladium, we could interpret that US economy shrank by about 30% since Nixon. This is also noticeable on what the econ geeks call “asset inflation”, or observation that some things of real value experience much accelerated rate of inflation. For example, during the entire 5 years I was at Berkeley, the out-of-state tuition stood still at $12K/year. It is over $40K/year this year, which is twice as much as Stanford and various Ivy Leagues were asking back when. No chance somebody could’ve walked in through the front door today, like I once did, figuratively speaking. This kinda defeats the purpose of specific form of asset stripping known as brain drain. I think the general idea was to keep me. (I did fulfill my American dream in accelerated fashion though, by getting rich quick in .com boom) Those were also the only times in recent US history when Uncle Sam ran a budget surplus, which some attribute to happy asset stripping of the former Soviet block by means of shock therapy.d) Now, do you reckon Stiglitz really minded asset stripping so much? I honestly don’t think so. He only minded the “corrupt variety” i.e. that with undesirable/unknown beneficiaries. Look at this way. What if you suddenly could steal absolutely anything you want in the late Soviet city of Moscow. Say, a really fine Ferrari from some already rich dude? But than you wouldn’t be able to take it outside of the Garden Ring, not to speak of your dacha. Shmerari? Same difference. A yacht? Maybe, but the foreigners say you need something called Riviera to go with that and they won’t ship. Damn. Soon, the smarter cookies figured out that the best thing to steal is some kind of boring industrial asset. Say, a really large tractor instead of Ferrari. It might be rusty and nothing to look at, but it’s got much better residuals. Also, it doesn’t really matter that much if it is of prestigious Soviet make, if it does what a large tractor does.Here is upbeat cartoon of a budding young oligarch, piglet called Petr, who did just that. Nicked a tractor and is now ready to leave this aweful Russia place with his newfound riches, starting a new life somewhere better.You can take it a satirical take on the life of, sayPetr Aven - WikipediaNo, he didn’t nick a tractor. He nicked the Soviet ministry of foreign trade I told you so much about and now runs the largest commercial banking group in Russia that is not yet in state hand. There, there is a bit of problem for Petr. The tractor is a bit too large. How could you put this guy on the CAATSA list? There is hardly anyone around who is more enthusiastic about Soviet asset stripping done right. He’s even got a book published, calledGaidar’s Revolution: The Inside Account of the Economic Transformation of RussiaSo cute! Now his hands are tied - time to turn into a proper Russian patriot! (likely also a newfound patriot of Israel, just in case) Because once faced to choose between their favorite playgrounds somewhere they park their yachts and their feeding grounds in boring old Russia (where the tractor is) they have to choose the later. (The playground vs feeding ground dichotomy is attributed to some work of young Khodorkovky, who nicked most of Soviet oil industry, composed in his spare time in prison) Same for Mr. Deribaska. If he wasn’t previously necessarily the best friend of Kremlin’s, he sure is now. The holding company for RUSAL (incorporated in Jersey, listed in HK) and his holding for holding that holding called EN+ (incorporated in Jersey, listed in London) are being moved back to Russian jurisdiction as we speak. Again, no choice. The underlying assets are not exactly portable. Young Deripaska started relatively small BTW, he only nicked the largest hydroelectric dam in the country for his first tractor.So, how do you nick something like that? Well, you use the Soviet governments own money that was previously not available as cash to do something like aggregation of privatization vouchers every citizen normally got only one of. That gave the cash ruble an incredibly inflated purchasing power, if you only knew what to buy. The rubles became cash via passing through needle eye of foreign trade twice, in affect. Geddit?e) Here is fine example of how the modern economists like Stiglitz are very selective followers of Adam Smith’s, whose real contribution to economic sciences was the political economy and not the invisible hand BS that has been debunked long time ago.Behold this fine article in Forbes I just bumped intoWhich Has The Bigger Economy: Texas Or Russia?First, a tiny correction. The Russian benchmark crude is called Urals, not Brent. Under normal circumstances, it would be available at about 10% discount to Brent. But not right now, after Uncle Sam took out all the other sources of extra heavy crude, which are Venezuela and Iran.Crude Oil Prices Today | OilPrice.comshows Urals trading at a minor premium to other benchmarks and the only one in the green today (going up, not down) I reckon somebody is experiencing additional demand for diesel and/or aviation kerosene, like that JP-8 start. For tanks and stuff. Because the extra light and sweet kind fracking produces is only good for regular gasoline :)Other than this, what exactly did the find? Price of oil drops to 1/2 its value, so does the ruble. What decoupling? Not that there was any to start with. It is simply a common misconception. See, the Bank of Russia, their central bank, is constitutionally required to not invest into any Russian issues. Only reputable countries. So, the ruble has a very similar structure to the said SDR. Meaning, it is largely the same as the dollar, with a sprinkle of EUR, GDP and yen. What is CERTAINLY not there is any assets related to oil extraction, or anything at all in Russia, with exception of physical gold. For all practical purposes, it is pretty much a branch office of the Federal Reserve. So, why the coupling? Does anyone have a hunch of what’s up?e) Which finally brings us to Washington Consensus as such, a framework invented for various banana republics set up for asset stripping done richtig, so that Stiglitz could approve. The 10,000-foot view of it is such that there is no way for local pigmey’s currency to become an investment vehicle. The local central bank may issue some kind of banknotes with celebrity mugshots, for exampleor regional architectural landmarks, as pioneered by EURBut only as many as they’ve got “foreign exchange reserves” denominated in reputable currencies. So, it is mostly dollars ind different livery. Now, we are getting into the numismatic value. I reckon, the elaborately bearded and mustached characters in medieval hats might signify a country too pathetic to find a collection of recognizable modern-age celebrities of local origin and have to resort to Sylmarrilion? for inspiration. Highly recommended is the collection “Hungarian Hirsute”. You reckon those be elfs or dwarfs?However, than the Huns did something really pukka proper. Behold, the medieval hat alonewithout hairy dudes. That and giving the IMF the boot. So, there is really hope for them. On the face of it, any hairy dude wearing the hat (aka Holy Crown of Hungary) would do. But not really! It takes a special mofo to fill Atilla’s? hat. The cranium got to be extremely large and peculiarly deformed. Here, a fail.I think the Huns should hire Oprah Winfrey, who’s got the largest cranium of any woman ever measured for their Queen. SeeThe brain size of the World’s most successful womanThan you add a Soros and an Erdos and it’s not too bad already. Three types of celebrity banknotes are always sufficient for any change (using balanced ternary) So, I am afraid, the Sylmarrilion award for most hirsute dudes in medieval hats banknotes has to go to Ukraine, after all.Now, to recap, the macroeconomic cycle. You know, how the private banks increase the money supply but issuing credit in a currency. Than somebody gets the money in exchange for services and goods and it gets saved. Than savings become investments and only than does the new money become part of the GDP. Right? Than we have the slightly mischievous Spanish Inquisition version, where the money gets issued as nominal 0% consumer credit to pay for junk in a reputable jurisdiction Aldi-Nord jurisdiction based on (fractionally reserved) assets they’ve got back home in Spain. It does seem a little bit odd that it is much easier to finance some disposable junk instead of something fundamentally valuable like a mortgage that also is a useful collateral, but it is not obvious here at whose expense the profiteering happens. New treatment of usury with effectively negative interest rates is badly overdue. I am not aware of any scripture that does it yet.Now, the Washington consensus scheme for banana republics like Russia. In order to issue some local scrip, the Bank of Banana Republic has to purchase assets of credible issues. As such things are, mostly Uncle Sam’s. This means that money created by private Banana Republic banks has to be saved in correspondence accounts with US banks. Than, the money becomes investment in US first and may only return as effective foreign direct investment in USD. Needless to say, the economies of all the banana republics under the auspices of Washington consensus framework are strictly subadditive to that of USA, who gets to skim some cream. Think, a modern reissue ofDroit du seigneur - WikipediaNow, this particular banana republic called Russia has been misbehaving lately! Every time, there some kind of investor scare, like new kind of sanctions. Boo! Foreign investors scram. And? In the spirit of buy low, sell high, Russia spends some of its rather massive and still growing trade surplus on buying back domestic assets on the open markets. This results in a creeping nationalization of sorts, with up to 70% of economy back in state hands. And? Nothing is broke. Moreover, it is no longer possible to engineer a stupid shortage of trivial consumer goods that was critical to breaking USSR’s back once. Because Communism has already won! Not in Russia, but in a place called China nearby. The Chinese have turned out to be astute observers and are obvious intent to not repeat the mistakes of USSR (also not the Japan’s, Uncle Sam’s/the collective West’s previous contract workshop of choice, though the Plaza Accord - Wikipedia is slightly off topic to our current theme) Thus, they are in no real danger to ever become a banana republic ruled through the local branch office of the Fed. Meanwhile, you and me get to enjoy all the consumer-grade junk that is fit to toss into small envelope, courtesy of Chinese prisoner child labor and that Jack Ma fellow. Power to the people!This essentially ought to provide a strange coupling that the Russian currency seems to exhibit to the oil price, despite being invested anywhere but in Russia. The coupling is fed back by re-acquiring back the people’s tractors, some enterprising piglet Petr once nicked. As in equity stakes and fixed income issues made by major corporations resident in Russia, a lot of whom do happen to be in oil and gas business.Now, there are some reputable countries who do something similar. Take Norway. They’ve got a sovereign wealth fund that performs even better than Russia’s. Good for them. See, this happens to be because Norway diversifies into other reputable markets. One hears that the business is swell. So swell, that they are quitting the oil and gas holdings that made them rich and getting into US tech stocks instead! The only asset class that is even more profitable. Good people, so environmentally diddly conscious. I am sure you’ll get an enthusiastic tweet from Trump one day, if only anybody explain what Norway is to him. He already knows much about Finland all right'Make America Rake Again': Confusion in Finland over Trump's wildfire commentsNow, lets see. What would you rather own. Russia’s Gazprom, a company that sits on world’s largest proven reserves of natural gas that are enough to supply all of Europe for a few centuries?Or Uber, some kind of startup who make a widget which knows how to summon a gypsy cab. Never made a cent and most likely never will.Both happen to have about the same market cap, some $70bln. Which one is the toxic asset? Of course. And the other is nearly Zimbabwean-landmark level numismatic value (see above) I’d give you my buy recommendation for Uber, but only if they issued stock certificates on paper. Which they won’t, so no. Don’t buy this junk, even if the mighty Norwegian sovereign wealth fund does.There are some subtle advantages in reinvesting only in domestic assets. For example, nobody can simply arrest (an euphemism for STEALING in broad daylight) them. See what happened to Venezuela, all of their assets in US, as much as denominated in USD as well as their Central Bank gold stored in London. Well, it seems Uncle Sam got away with it again, but I am pretty sure that was the last foreign gold the Brits are ever going to see. Bad business practice to steal from your clients. Incidentally, the Austrians recalled all of their gold from London back in 2015 already. How did they know? In Russia’s case, the answer is diversify THIS. Want to steal something of ours, COME AND GET IT. Here is the US position on that, as stated by Texas vs. Russia above.Want to know how big Texas really is? Let’s compare its economy with that of Russia, the world’s largest country by area. As you probably know, Russia’s been in the news a lot lately, so the timing of this comparison makes sense. The U.S. just levied fresh sanctions against the Eastern European country for its alleged meddling in the 2016 presidential election, and early last week President Donald Trump warned Russia that the U.S. military could soon strike its ally Syria in response to its use of chemical weapons—a promise he kept Friday evening.Translation. Even though this Russia place does not have the economy of just one of our states chosen at random, we will graciously refrain from kicking their ass just yet. We do reserve the right of beating up their even wimpier ally Syria instead. Also, our great POTUS is a seer, blessed with a gift of premonition, so he knows that they were going to use some chemical weapons anyway, ahead of time.Hold that thought. A second article from Forbes in the same train of thought.There’s No Real Reason To Sanction Russia AnymoreA quoteOther than just hating Russia because it’s, well, run by super Bond villain Vlad Putin, there is no reason to sanction Russia anymore than it already is.So. There was no Russian collusion. Also, no actual Russians? But sanctions are great anyway. Because Putin!And indeed, the CAATSA Act passed 419–3 in the House and 98–2 in the Senate. That, my friends, is DPRK-level unity displayed. Would be too much work to undo all this legalese now. Much filibustering involved, boring stuff. Instead, lets do something fun. How about we bomb Iran?And finally, a choice quote the Economist article recently discussed already.Partnership is much better for China than it is for RussiaSweet patienceRather than railing against Russia or trying to woo it back, the West should point out its subordination and wait.Indeed, who do they think they, those pesky Russian peasants, not knowing their rightful place! Patience failing. Lets pile some more sanctions for the stuff. What’s his face, Skripal.So, get this, there are some new, novel kinds of sanctions. Apparently, the US intends to prevent any financing for Russia coming by the way of IMF and WorldBank. Like, seriously? The Washington Consensus institutions begat by Breton-Woods? In case somebody doubted those be anything but tools of American foreign policy. Of course, bring it on! Russian sovereign debt is 10% of GDP, less that liquid assets. Not really borrowing anyway. Moreover, has Russia been a member ofParis Club - Wikipediaa faithful creditor, however insignificant in scale. This involved going through two defaults and paying back all of USSR’s foreign debt alone, as its sole legal successor. I believe last of it was in 2017, to Bosnia-Herzegovina for their share of the money once borrowed from Yugoslavia. I say, good riddance. The IMF has no longer anything to do with financing anyway. For example, because according to their official bylaws, they may not lend to countries who have outstanding obligations to members of Paris Club. For example, Ukraine, which is in arrears on a few billion owed to Russia here and there. Were any of this to have anything to do with finance anymore, would Ukraine have to go into default first. But it won’t, because the IMF keeps financing them nonetheless. Basically, another racketeer influenced and corrupt organization. If you are with some kind of aspiring banana republic, avoid at all cost. Take me to your chieftain (or explain yourself to them)And last, but not least, US intends to prevent Russia from issuing sovereign debt denominated in USD and anything else they manage. Oh really? Please, do this first of all! Great reason for Russia to start borrowing in own currency, so that it can turn into investment currency. Just like the economic textbooks say! Russian banks will issue ruble credit, to be saved and become investment all within the country. Without the unnecessary Washington Consensus intermediate of having to transfer all the capital in Russia to (mostly) USA to acquire the (mostly) USD-denominated whatevers that are acceptable collateral to back up the issue of rubles needed for investment domestically. This is apparently not what the Stiglitz idiot considers asset stripping, so we’ll call it Uncle’s Sam “commission” instead. Again, the only acceptable investment in macroeconomic sense in Russia is foreign investment right now, because all the money saved has to be exchanged, brought out and pass trough at least one savings-to-investment period of some reputable economy (but mostly USA) Incidentally, counting towards their GDP. Like some kind of 52nd? state (Nah, not really. Is insufficiently square-shaped, apparently)On upcoming episodes of “adventures of imbeciles equipped with pseudo-Nobel in economic sciences of bunk”Milton Friendman and the Fort Knox of the Ancients ( of the Federated States of Micronesia. Or was it Macro? )https://www.karlwhelan.com/IMB/Friedman-Yap.pdfBuy our report, get a complimentary copy of “Debbie does Dallas”. Because, Texas! What about it? A feeling it is not in Kansas anymore?John Maynard Keynes’ rejection of math (a tour de force triumph of ideology) SeeSt. Petersburg paradox - Wikipedia