Porter Stansberry: End the Ban on US Oil Exports

Porter Stansberry doesn’t mince words. Politicians? Scumbags. People in general? Lazy. Laws against oil exports? Disastrous. In this interview with The Energy Report, the Stansberry & Associates Investment Research founder argues that oil exports could usher in an era of unprecedented prosperity, if legislation would only allow it. However, he says there’s no holding back U.S. energy wealth; the profits will sprout up in oil- and gas-related industries like fertilizer, petrochemicals and shipping. Find out where Stansberry is putting his money. This time, it’s not on E&Ps.

The Energy Report: As a history enthusiast, Porter, to what extent do you believe technology has changed investing?

Porter Stansberry: The future will be unlike the past in every way related to technology, but it will be exactly like the past as it relates to people. Technology changes a great deal, but people don’t. You can count on politicians to be scumbags and most people to be lazy. But as for investing, technology gives far more people access to information. Only one person in the world knew the actual price of a high-yield bond 25 years ago—Michael Milken—and he made a fortune with that information advantage. Today, everybody has access to trading information. Everyone has access to price. In general, technology has made finance a smaller-margin business. It’s led to enormous scale in our financial institutions, which is the only way they can really survive. But fear and greed are still the underlying forces that drive the markets, and investors are just as subject to irrational emotional decisions as they’ve ever been. I don’t expect technology will ever change that.

TER: Getting specifically into energy, a few weeks ago the International Energy Agency World Energy Outlook (WEO) said the U.S. would become the world’s largest oil producer, overtaking Russia and Saudi Arabia, before 2020. Then Goldman Sachs said it would happen by 2017.

PS: They stole my thunder. I’ve been saying 2017 for maybe a year now. If Goldman is saying 2017 and IEA is saying 2020 it will probably happen in 2016.

TER: How will the geopolitical and socioeconomic landscape change when the U.S. becomes the largest oil producer?

PS: One of the biggest drags on the U.S. dollar over the last several decades has been the trade deficit resulting from petroleum imports. That’s going to largely disappear, though not completely because we’ll still need some petroleum imports for certain flavors of crude. As for exports, considerable legal hurdles remain. We have archaic laws about oil because we had long believed that oil was a strategic resource and that the world was going to run out of it in the short term. Unless we change our laws to allow exports of crude oil, none of this magnificent new supply is going to aid our economy at all. In fact, we’ll have a terrific glut of oil, and we’re already at record levels of storage. The price hasn’t collapsed yet because unrest in the Middle East is causing fear to inflate the market price, but the price will absolutely collapse if we don’t allow for oil exports. The entrepreneurs who brought us this incredible new supply would, in that scenario, suffer, and many companies would go bankrupt because the oil industry is not capitalized to survive $50/barrel (bbl) oil.

But to answer your question—how the geopolitical and socioeconomic landscape will change when the U.S. becomes the largest oil producer—I’d have to know the unknowable, which is how or if oil policy will adapt. So far, it doesn’t look good. So far, 12 companies have applied for licenses to export LNG, and only one license has been granted. I don’t think the Obama administration is ever going to do anything to help the domestic oil industry. And I think that the result will be a price collapse and an oil glut that will harm our economy.

TER: You mentioned one company has a license. Who is that?

PS: The Department of Energy granted a conditional permit to Cheniere Energy Inc. (LNG:NYSE.MKT). It’s an ironic story. For many years I was a short seller in the stock. In fact, I published an article in 2006 when the stock was trading between $30 and $40 per share. I wrote that this company’s business model was beyond stupid and had ventured into insane territory. Its plan was to import LNG into the United States and the company built a $6 billion ($6B) facility, the Sabine Pass LNG Terminal, to bring in natural gas from Qatar. I said it was insane because not only was the U.S. on the verge of a huge glut of natural gas, but for decades the U.S. had either the largest or second-largest reservoir of gas anywhere in the world. So the U.S. importing natural gas is like Saudi Arabia importing sand. It doesn’t make any sense.

Of course, natural gas prices collapsed and Cheniere almost went bankrupt. It saved itself by selling new equity to a very smart group in New York, Blackstone Group. With the money raised from Blackstone Group, Cheniere switched that facility from imports to exports and applied for an export license long before government officials thought any market for U.S. export gas would materialize. Cheniere got lucky.

TER: To what extent will manufacturing and petrochemical industries move to the U.S. to take advantage of cheap natural gas prices?

PS: There’s roughly $40B worth of construction going on in the chemical industry. You’ll see the same kind of growth in fertilizer. You’re also going to see huge growth, which hasn’t really started yet, in refined products. Imagine it this way: If the government won’t allow exporting energy in the form of crude oil, then you can damn well bet that entrepreneurs will find a way to export that energy in some other form. Fertilizer is energy rich and easy to ship, so we’ll have a huge boom in domestic fertilizer production. How about propane? There’s no law against exporting propane. Targa Resources Corp. (TRGP:NYSE), a company we recommend, is expanding its Mont Belvieu import/export complex to boost propane export capacity.

The funny thing is the energy will find a way out of the country. That’ll be good for our economy, but it’s so inefficient. We’ll have enormous investments in all these industries surrounding the energy complex that are much lower margin. It would make so much more sense to just export the oil.

TER: But wouldn’t bringing in more production manufacturing have the additional advantage of creating jobs?

PS: Yes, but it’s not the highest and best use of our time, our capital or our people. This is something important about economics that people do not understand at all—comparative advantage. The U.S. has enormous comparative advantage in lots of different industries. Manufacturing is not one of them. Neither are giant refineries. Yet that’s what we’ll be stuck with.

TER: What would change the equation?

PS: There’s really no easy answer. It’s mind-boggling. Imagine for a moment where Saudi Arabia would be today if it hadn’t exported its oil. It could have a huge petrochemical business and be the world’s leading producer of fertilizer and plastics. But guess what? The fact that Saudi Arabia put its resources to their highest and best use made it one of the richest countries in the world.

TER: So maybe we should export oil rather than gas.

PS: Absolutely. To make natural gas as our main export energy source would cost trillions to build enough of these terminals and it would take decades. Why not just hook up a pipeline of crude oil to a tanker and be done with it? Natural gas is so clearly better suited for domestic energy needs. We should export the crude and use the gas domestically, but that’s not what will happen. We’ll end up with higher prices on domestic crude with very little export and that’ll be disastrous.

TER: You’ve described shale oil and natural gas in North America as one of the biggest investment opportunities. How do you reconcile that outlook with depressed prices?

PS: You can be very bullish on production without being bullish on price. In fact, I think that’s the only logical position. When natural gas was at $4–5 per thousand cubic feet (Mcf), I said it would go below $3/Mcf and people thought I was out of my mind. It’s not only gone below $3/Mcf, it’s essentially stayed there since 2008 or 2009. As you drill more horizontal wells, as production in the Eagle Ford and the Bakken and other places soars—just look at oil storage. We’ve never seen this much oil in storage in the U.S. There’s no doubt the price will crack eventually, and when it does it will crack hard.

I’ve been telling my subscribers not to buy the exploration and production (E&P) companies but to buy the companies that are able to use lower energy prices to their advantage in their own markets, such as fertilizer companies and terminal and shipping stocks, such as Targa. You can find opportunities coming about in lots of little nooks and crannies because of the excess energy supply.

TER: What are some other examples of energy-related opportunities?

PS: The big way is to play lower energy cost in the U.S., or just to find any business that uses energy and can get a retail price for the product. Think about Calpine Corp. (CPN:NYSE), an unregulated producer that converts natural gas into electricity. The price of electricity in wholesale markets is dominated by coal-generated electricity, so Calpine stock price is essentially a way to arbitrage the price of natural gas and the price of coal. If gas remains cheaper than coal, Calpine’s earnings will go up—and that’s what I believe.

Another good example is fertilizer. About 75% of the cost of fertilizer is made up of natural gas but the price of fertilizer is based on supply and demand. Global demand for food, of course, continues to grow quite rapidly, and due to the inflation of the dollar, farm prices continue to rise, so there’s plenty of capital for buying fertilizer. This is another simple way to play and there are lots of good fertilizer stocks out there. The one we’ve recommended is called CF Industries Holdings Inc. (CF:NYSE).

And, then, of course, look for companies that are constructing the pipelines, making the steel for them, handling the storage, building the terminals. We’ve recommended lots of those companies.

TER: When you mentioned businesses that take advantage of lower energy costs, you mentioned those building terminals. Why would we want more terminals if the law won’t allow exporting oil?

PS: Terminals aren’t necessarily just for export, but also storage and distribution. We need huge new storage facilities, huge new pipelines and huge new terminals all across the country mostly to move gas but also NGLs and crude oil. Right now we’re using railroad cars to move crude out of the Bakken in North Dakota, which is very inefficient.

TER: Whereas producers need higher prices to sustain the production costs.

PS: Mostly, yes. Operating costs are actually very low once the wells are in place. To drill a well in the Eagle Ford, for example, costs about $7M, but you can make that back from production in 90 days. The problem these companies face is the cost of buying additional acreage. As soon as people know oil’s around, real estate prices go bananas and companies have to borrow tons of capital to buy the leases and drill before the leases expire. This puts tremendous capital pressure on their balance sheets.

The number-one thing to be careful of right now in this space is the oil companies that have been rewarded for building huge real estate portfolios but have done so with tons of borrowed money. That puts these companies in a precarious financial position if the price of oil falls. It’s not because they can’t produce oil for $35/bbl. They can. However, they wouldn’t be able to pay off the debt on their balance sheets.

TER: Considering the glut of natural gas, do you foresee changes in the way U.S. consumers use energy?

PS: We’ve already seen a huge shift in what I’ll call the robust transportation sector, the big trucks and the buses, moving into natural gas. That’s absolutely going to continue and it’s going to grow. However, to build these things in a way that’s safe requires a big, heavy vehicle, so I don’t think you’ll see that at the retail level.

Porter Stansberry is intense when it comes to investing and recreation. His Atlas 400 Club brings together intelligent, successful people from all over the world for adventures that last a lifetime. See a video from his travels, including a recent trip that included racing Porsches in Germany.

Most people in the U.S. don’t understand the role that energy plays in our economy. They don’t understand that the boom from 1900 to 1925 was fueled mostly by the oil found at Spindletop in Texas. They don’t understand that all the success we had in World War II and the boom that led to the1950s and 1960s came from east Texas. Literally the energy that drove all of that productive capacity came out of the ground with the east Texas discovery of 1930. The size of the discoveries found recently dwarf that. East Texas ended up being a 4B bbl field of oil. Every one of these new major shale plays contains 20B bbl of recoverable oil—all five times bigger than east Texas and more than 20 of them are currently being drilled. We’re sitting on the biggest economic and financial boom in the history of our country and we’re strangling it.

TER: If indeed we’re sitting on all this gas, why doesn’t the price of gasoline at the pumps go down? And if natural gas can create electricity, why aren’t we seeing more electric cars?

PS: Because electric cars don’t work. How many dead Fiskers do you need to see before you realize they’re not reliable? The hybrids are fine because they’re still using gasoline to drive them. If it makes it good for you to turn gasoline into electricity before it spins your wheels, it’s fine with me. But it’s completely unnecessary. In regard to electric power, we don’t have the battery technology yet to make this work. It’s not even close. That would be great but it’s naive to think we can plug all of our cars into the power grid. Can you imagine if everyone could overnight just plug all their cars into the power grid?

By the way, all those power plants would be coal or natural gas, so you’d still be consuming hydrocarbons. So electric cars are just fantasy devices. They don’t make sense technologically, economically or ecologically.

And as for prices at the pump, a very important thing that people don’t get at all is that gasoline isn’t oil. It’s a derivative of oil. The lower price of oil will increase the crack spread, which will make refiners more profitable. But gasoline comes from refineries, and no new refineries have been built in the United States since 1974. If you want cheaper gasoline, guess what you have to build.

TER: Refineries—but earlier you said that’s not a good use of capital.

PS: It is not a good use of capital for export but it’s incredibly important for the domestic market. And guess who sponsors the green politicians who don’t want any refineries built? The refining companies. They don’t want any more competition. People think the Keystone XL Pipeline didn’t get built from Canada to the U.S. because the Obama administration’s full of these ecologist folks. No. The pipeline didn’t get built because the E&P companies in America don’t want to compete with Canadian crude.

TER: Any other insights you’d like to give to readers of The Energy Report?

PS: Yes. If they want to know what’s ahead for the oil markets, study the natural gas markets from 2008 through 2010, because the same technologies are being used in the same fields and the result will be exactly the same. There’s going to be a glut of domestic oil, and the oil companies that have leveraged their balance sheets to buy lots of acreage will have a very hard time.

TER: Assuming of course that we don’t change some laws to allow exports.

PS: In that case, everything would change overnight. First of all, the global price of oil would equalize between West Texas Intermediate and Brent, at somewhere around $100/bbl. The profits these U.S. companies would make would be fantastic for our economy and it would be great for the shareholders. Unfortunately, the odds say that American politicians won’t make any kind of wise economic choice. That only happens by accident.

TER: Let’s keep our fingers crossed for a serendipitous accident, then. Thanks, Porter.

Porter Stansberry founded Stansberry & Associates Investment Research, a private publishing company based in Baltimore, Maryland, in 1999. His monthly newsletter, Stansberry’s Investment Advisory, deals with safe-value investments poised to give subscribers years of exceptional returns. Stansberry oversees a staff of investment analysts whose expertise ranges from value investing to insider trading to short selling. Together, Stansberry and his research team do exhaustive amounts of real-world independent research. They’ve visited more than 200 companies in order to find the best low-risk investments. Prior to launching Stansberry & Associates Research, Stansberry was the first American editor of the Fleet Street Letter, the oldest English-language financial newsletter. Read more Stansberry oil insights and Porter’s Atlas 400 Club.

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Things to worry about

Is this not one of the biggest threats to Pittsburgh’s economy in years?

Why a local economic story? A lot of this stuff is not leaving here by plane:

If you dig into that export data lots of things pop out.  The value of international exports in “Mining (except oil and gas)” went up over 60% between 2010 and 2011.  That is data for the MSA, which means it does not even capture the prodigious coal being mined in nearby counties like Greene.  Might be worth noting that more recent national data shows more coal exports for 2012 thus far at least when measured in tons, if not value.

Doing better in our neighbourhood

A key intuition of modern thinking in international trade and international finance is that distance matters much more than we think.

We may like to believe that the world is becoming more flat. We may like to believe that for weightless things like services and financial flows, distance is irrelevant. But the research evidence is unambiguous: there is a `gravity model’ in the affairs of men. The interactions between two countries tend to go up in proportion to the product of their GDP, and vary inversely with the squared distance between then.

Traditional trade theory would encourage us to think that India and Sri Lanka (say) have similar factor endowments, so the gains from trade might not be so great. But this is not borne out by the evidence: some of the most intense trade relationships are found between countries in Europe and between the US and Canada: between countries with very similar endowments.

In this region, we need to be much more mindful of the importance of intra-regional finance and trade activities. For India, this means a strong emphasis upon East Africa, the Middle East, Pakistan, Central Asia (by plane today, but someday we should get to road connectivity from the Indian ocean), the land route to China through Tibet, Nepal, Bangladesh, Burma, Singapore and Sri Lanka. India stands out, in international comparisons, for having unusually low economic engagement with its neighbours. This implies that there are opportunities for very large gains. In recent years, some Indian firms have emphasised these countries in their internationalisation strategy (both trade & investment), reflecting a greater role for natural conditions dictated by geography.

Some of these places are hobbled by political problems and abysmally low GDP. The product of the two GDPs matters, and bad political systems like to interfere with globalisation. The wise thing for us to do is to have a consistent and welcoming engagement strategy, waiting for the time that the country finds its feet in terms of establishing a healthy political system, waiting for the country to engage. A good example of India doing something right is the positive approach towards MFN status for Pakistan. We have to wait for Pakistan to understand that this is in their self-interest – and I do believe that in time, they will – but there is no reason for us to get stuck on reciprocity.

Of particular interest in recent months is Burma. Hamish McDonald has a beautiful piece titled Tractors may have replaced horses, but country is still decades behind.  If Burma comes out of its deep freeze, then the opportunities for trade and financial links with India are huge. We would go closer to the arrangements which were prevalent in the early 20th century, which reflect the natural opportunities.

With increased trade & financial linkages will come greater macroeconomic correlations a.k.a. shared interests. I saw a fascinating new IMF working paper by Ding Ding and Iyabo Masha titled India’s growth spillovers to South Asia. This finds that after 1995, Indian growth has a significant impact in the region. If this is a robust finding, it is new; the idea that Indian business cycle fluctuations reach out and influence the region is not part of our intuition, particularly given the onerous trade barriers in place. Perhaps there is a lot more trade going on than meets the eye.

Redistributing Wealth

In an axiomatic sense, wealth is always distributed in some way. Likewise, any transfer or exchange of wealth is a redistribution of wealth.

Redistribution of wealth comes in two forms: coercive and voluntary. The former method of redistribution is associated with socialism and, more generally, any statist attempt at transferring the goods or wealth of an individual or group to another individual or group. The latter method of redistribution is associated with capitalism and, more generally, any form of voluntary exchange.

It is obvious, then, that wealth is continuously redistributed. People constantly desire to trade some portion of what they have for something else they desire more. Thus, redistribution of wealth occurs in the free market, and often occurs via the mechanism of exchange. However, there are some instances when wealth is redistributed freely, such as when a parent provides for his child in exchange for nothing. More generally, though, the redistribution of wealth in a free society usually requires exchange.

Therefore, what those who clamor for the redistribution of wealth actually desire is an option to acquire wealth by force in exchange for nothing. They may not be inherently opposed to trade, nor may they be totally desirous of charity—particularly if that charity has behavioral strings attached. Rather, they simply desire to have the option to have wealth redistributed to them without having to offer anything in exchange.

MF Global and HSBC case

As usual, Zero Hedge and others hype a story way beyond the reality (see here for the Bloomberg story), such as:
ZH: ”is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances.”
TF: “A lawsuit such as this one could easily bring about the total destruction of the Comex/LBMA-based, fractional bullion banking system”
Here is a suggestion, read the actual Interpleader Complaint for the facts:
1. Mr. Fane and MFGI entered into five COMEX gold contracts and three COMEX silver contracts relating to the Property. HSBC is the depository for the Property pursuant to a certain Gold Delivery Point Agreement and a certain Silver Delivery Point Agreement entered into between HSBC and the New York Mercantile Exchange, Inc.
2. By e-mail dated October 25, 2011, MFGI notified HSBC that “MF Global’s customer Mr. Fane would like to take possession of [the Property] and move [the Property] to his account at Brinks (sic). I have already canceled for load out. Customer will advise of date and time.”
3. Mr. Fane did not contact HSBC to request that the Property be transferred to his account at Brink’s prior to the Commencement Date.
4. By letter dated November 18, 2011, HSBC, through its undersigned counsel, notified the Trustee that it had possession of the Property. HSBC also notified the Trustee, in light of HSBC having received instructions from MFGI prior to the Commencement Date to transfer the property to Mr. Fane upon his request, that HSBC would act in accordance with MFGI’s prior instructions barring an injunction or contrary instructions from the Trustee.
5. By letter dated November 21, 2011, Mr. Fane requested that HSBC transfer the Property to his account at Brink’s.
6. By letter dated November 22, 2011, the Trustee, through his counsel, asserted to HSBC that the Property constitutes customer property under Part 190 Regulations of the Commodity Futures Trading Commission and that the treatment of the Property must be administered by the Trustee. The Trustee further instructed HSBC not to release the Property to Mr. Fane.
7. By letter dated November 22, 2011, HSBC notified Mr. Fane that the Trustee had instructed HSBC not to release the Property to him and that the Trustee asserted an interest in and claim to the Property.
Not being a lawyer, I read this as “before you went bankrupt, you said I could have my metal”, “yeah, well, you didn’t take it before I went bankrupt, so it is now part of the bankruptcy proceedings”.
So no rehypothecation or loaning, no “suing” by HSBC, no stealing or counterfeiting of the bars and certainly not the total destruction of bullion banking. Just another lesson in counterparty exposure and possession is nine tenths of the law.

Pakistan, India, MFN: What are the implications?

For once, I am pleased at how India played it: India gave Pakistan MFN status way back, in 1996, without getting into the silliness of reciprocity. A hallmark of professional competence in international trade is the idea of unilateral liberalisation: Even if another country is silly enough to have barriers against us, we should not have trade barriers against them. Removing barriers against India’s globalisation is a favour to us, regardless of what it does to anyone else. India often gets into cul de sacs by obsessing on reciprocity – e.g. we won’t open up to imports of agricultural products because the Europeans won’t. We won’t allow foreign banks to operate in India because some other countries have barriers against the operations of Indian banks. And so on. But for once, in this case, our guys seem to have played it right (and way back in 1996, too!).

And now, we have a nice next step: Pakistan will give India MFN status. What might happen next? Here are some conjectures:

  1. At present, there is significant Indo-Pak trade; it merely gets routed through Dubai. Once Pakistan gives India MFN status, the entrepot trade that was going Bombay -> Dubai -> Karachi will go Bombay -> Karachi. This is bad news for Dubai and for individuals and firms which are invested in the future of Dubai as an entrepot centre. Trade data should show a fairly sharp decline in India’s exports to UAE and a fairly sharp rise in India’s exports to Pakistan.
  2. There will be a boom in shipping, communication and trade serving the direct Bombay -> Karachi route. Similarly, the ports of Gujarat will do a lot of business directly to Karachi.
  3. At first blush, little changes: the goods that used to go via Dubai would now go directly to Karachi. But a recurring theme in economics is the extent to which apparently small frictions loom large. The removal of fairly modest frictions matters a lot for business activity. So when the cost of shipping goes down by roughly 3x, even though the cost of shipping may be small in absolute terms, this would have a big impact on trade. Another dimension of cost is the cost of the middleman in Dubai. The establishment cost of this middleman in Dubai would be eliminated.
  4. Important dynamics will now set in amidst firms in Pakistan. Firms that compete with exports from India will suffer. Firms that consume imported inputs from India will thrive. Creative destruction will take place; resources will shift from one group of firms to another. Exporters will be better able to export to India, both because of access to cheaper labour and capital that’s freed up by firms that die owing to import competition, and because of improved competitiveness that comes from cheaper raw materials. Exports from Pakistan to India will go up significantly.
  5. Large Indian and Pakistani corporations will look much more seriously at the opportunities that lie just beyond the national border. Over time, human capacities and human networks will build up on both sides, supporting cross-border operations. This will take time to ripen, but when it does, the effects will be large. A huge fraction of global trade is intra-firm trade, so it’s very important to have large firms of both countries having operations in both countries, in order to get growth of trade.
  6. The biggest gains in India will be in Gujarat, given the myriad ports in Gujarat which are a short distance away from Pakistan. But in the future, if road and rail links open up, then there are big opportunities in Punjab also. Wouldn’t it be nice to have a NHAI style road running from Ahmedabad to Karachi, and from Amritsar to Lahore?
To the extent that we’re merely rerouting trade, bypassing Dubai, this will impose no new stress on ports and airports in Pakistan. But to the extent that new trade is created – as I expect it will (and as argued above) – then new work will be required in Pakistan on enhancing the capacity of ports and airports. I would personally be surprised if the effects are not large.
In the intuition of economists, there is a gravity model in the affairs of men. Proximity and low transactions costs are incredibly important. The natural opportunity for India to grow international integration on all dimensions (goods, services, people, ideas, capital) lies in our immediate neighbourhood. India’s connections into the region are shockingly below those seen for all other large countries. Doing better on connections with Pakistan would be a nice step forward.
Consider a product like cement, which is ordinarily considered a non-tradeable. Transportation of cement is so hard, there isn’t a unified national market in India. There are a series of regional markets. But even in this, modifications of transportation have mattered greatly. E.g. when Gujarat Ambuja came up with the innovation (back in the mid 1990s) of sending cement from Saurashtra to Bombay, by sea, this was a very big deal. By that same logic, cement from the coast of Saurashtra can go to Pakistan (or vice versa, depending on who produces at a lower price).
We should not see trade in goods in isolation. All dimensions of globalisation are intimately connected to each other. To do more trade in goods and services, we need more movement of people. Ergo, the silly visa restrictions that both countries impose on each other need to be eased. Finance follows trade: So where trade in goods and services leads the way, bigger financial integration will inevitably follow with trade financing, cross-border banking, payments, purchases of information, operations of multinationals and FDI, INR/PKR currency risk management, and investment flows. More will need to be done on investment guarantees, export/import trade financing, etc.
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Reining in the inflationary dragon

A lot is being written about inflation in India today. I thought it’s worth writing about the fascinating insights into inflation that come from focusing on the distinction between tradeables and non-tradeables.

What is a tradeable

A tradeable is a product which can be transported across the world at relatively low cost. As an example, steel is tradeable while cement or paint are mostly non-tradeable barring special short-hop opportunities like Gujarat-Karachi or Amritsar-Lahore or Calcutta-Chittagong or Trivandrum-Colombo.

Steel is a nice tradeable that one can think clearly about. There are no barriers to the movement of steel worldwide. Hence, there is only a world price of steel. The quoting convention used worldwide is to express the price of steel in USD. The price of steel in India is thus the world price of steel multiplied by the INR/USD exchange rate, plus a markup for freight (The cif/fob ratio).

If there is a customs duty of (say) 10%, then the price of steel in India is 1.1 times the world price of steel expressed in rupees. For the rest, nothing changes when a customs duty is introduced. Gram for gram, every fluctuation in the INR/USD or the world price of steel shows up in the domestic price of steel.

Non-tradeables are things like cement (which are hard to transport) or haircuts (which are impossible to transport).


Before we can analyse and control inflation, we must measure it well. Inflation is defined as the rise in the price of the average household consumption basket. The CPI is the best measure of inflation in India.

Everything in the CPI basket can be classified into the two categories: tradeable vs. non-tradeable. As a thumb rule, WPI non-food non-fuel is a rough measure of tradeables inflation. Fluctuations in food and services prices, which make the CPI diverge away from WPI non-food non-fuel, are a measure of non-tradeables.

Year-on-year inflation reflects an averaging over 12 months. If you want to get a faster sense of what is going on, you need to look at point-on-point seasonally adjusted changes. These yield early warnings of inflation, which are 5.5 months ahead on average. Such data is updated every Monday by us. The shift from y-o-y inflation, to p-o-p SA inflation, is a free lunch in measurement and monitoring.

The WPI is a useful database of many price time-series in India. But the overall WPI is useless in thinking about inflation in India: there is no household in India which consumes the WPI basket.

The use of WPI inflation, and the exclusive use of y-o-y inflation, are litmus tests of professional competence in the Indian landscape.

The function of the central bank

The job of RBI is to deliver low and stable inflation: to deliver y-o-y CPI inflation of between 4 to 5 per cent.

They have failed in this task. From February 2006 onwards, in every single month, y-o-y CPI inflation has exceeded 5 per cent. This is an important time for introspection at RBI and outside it. What have we done wrong, in the structuring of RBI, which has got us into this mess?

It is useful to think of this as a principal-agent problem. The people of India are the principal. RBI is the agent. The principal hires the agent and gives him resources. In return, the agent has to be held accountable. Delivering low and stable inflation is the accountability mechanism. It is a quantitative monitorable measure of the performance of the central bank. That we have sustained failure on this function, from February 2006 onwards, suggests that we should be modifying the nature of the contract between the principal (the people of India) and the agent (RBI).

How RBI can influence the price of tradeables

RBI has absolutely no say on the world price of steel. In that sense, the prices of tradeables are beyond the control of RBI.

When RBI raises the interest rate, more capital comes into India, which tends to give an INR appreciation, thus making tradeables cheaper. Thus, an RBI rate hike does impact upon the domestic price of tradeables.

It is also worth pointing out that the central banks of most major countries are high quality inflation targeters. They deliver on their mandate of delivering low and stable inflation. As a consequence, inflation in the global tradeables basket tends to be low and stable. Tradeables prices are a helpful source of price stability, most of the time.

(That a large part of the CPI basket is tradeable, and seemingly beyond the control of the central bank, is no excuse. There are dozens of high quality central banks visible in the world, with very large shares of the CPI basket in tradeables, who are delivering on inflation targets. We in India should not accept excuses).

How RBI can influence the price of non-tradeables

Non-tradeables reflect aggregate demand and aggregate supply in India. RBI can influence these by raising or lowering the short-term interest rate. When interest rates are made slightly higher, household consumption and investment demand are slightly lowered.

A critical feature of non-tradeables inflation is expectations. If people expect 10% inflation, they tend to wire high price rises into their negotiation of wage and other contracts. This generates inflationary momentum. Particularly in a place like India, where the institutional structure of monetary policy is primitive, economic agents have little confidence in the ability of policy makers to rein in inflation. As a consequence, inflation is highly persistent. Once high inflation sets in, economic agents expect high inflation to continue. There is a great deal of momentum in inflation.

For years now, some economists have argued that inflation will subside by itself. It will not. Inflation does not mean-revert to the target zone of 4 to 5 per cent by itself. We are now in a trap of high inflationary expectations. This structure of expectations will need to be broken. This can happen in two ways. RBI needs to turn a new coat, and convince people that it now cares about inflation without any other conflicts of interest. And, rate hikes have to take place.

There are two paths to inflation control: changing the structure of expectations and reducing aggregate demand. The former is almost a free lunch. It only requires institutional change. The latter is hard work; it inflicts pain.

What about supply factors?

Some argue that supply bottlenecks in India – such as hideous rules about mandis – are the cause of inflation.

The trouble with this explanation is that the supply bottlenecks have always existed. They have existed in high inflation times and in low inflation times. It is, thus, not possible to claim that supply bottlenecks have caused the inflation crisis which began in February 2006.

Can rate hikes deliver inflation control?

When C. Rangarajan was RBI governor, there was an inflation crisis, and rate hikes did deliver on inflation control. The phase of price stability ushered in then lasted all the way till February 2006. This shows us that even in India, it can be done.

We have to remember that in his time, the monetary policy transmission was much weaker than what we see today. With a bigger wall of capital controls, domestic rate hikes did not deliver inflation control by impacting on the INR (through higher capital inflows). With a smaller and weaker Bond-Currency-Derivatives Nexus, the monetary policy transmission from the short rate into aggregate demand was inferior, then. Yet, he got it done.

Conversely, with a very primitive financial system and monetary policy transmission, the central bank of Zimbabwe delivered a nice hyperinflation. We can quibble about the potency of the monetary policy transmission, but we should not doubt the ultimate domination of monetary policy in shaping inflation. In the long run, little else matters in shaping inflation.

Part of the story of the 1990s lies in clarity of purpose at RBI and policy credibility. Rangarajan’s period had good quality speeches, which did not dilute the message on inflation control as the dharma of the central bank. In contrast, in recent times, RBI has repeatedly written low quality speeches. To an expert reader, they have conveyed the lack of knowledge on monetary economics at RBI. To the non-expert reader, they have waffled on the subject of taking responsibility, and have encouraged the average economic agent to think that high inflation is here to stay.

Book Review

I give up.

I have tried reading Krugman for several years but I just can’t do it.  I picked up Return of Depression Economics when I was a junior in high school, but I couldn’t finish it.  I use to subscribe to his blog, but I simply found him impossible to read on a daily basis.  I couldn’t even finish Pop Internationalism.

The biggest problem I have with Krugman is that he gets too caught up in his own perceived brilliance, and he has a tendency to become quite smug and condescending.  This usually becomes a problem because he isn’t often right, so reading him just makes me want to find him and then punch him dead in the face.  Arrogance is only amusing when you’re right.

Anyhow, Pop Internationalism isn’t all bad; Krugman manages to make a couple of good points.  They’re mostly contained in the first four chapters, so if you do eventually feel like reading this book, you needn’t bother reading beyond chapter five.

In the first place, Krugman is correct in noting that countries are not corporations, nor are they comparable to corporations, at least in terms of competitiveness.  The idea that the United States “competes” with Japan (or Germany or Britain or etc.) is a rather strange notion, and a fallacious one to boot.   Trade is not necessarily win-lose, which, come to think of it, sounds quite strange coming from Krugman.  As such, trading with Japan isn’t an inherently destructive behavior.  However, it is possible that trade can have negative consequences.  It should simply be noted that trade is neither inherently good nor inherently bad.  It can be either.

In the second place, Krugman correctly notes that, accepting the concept of competitiveness for sake of argument, a nation’s ability to compete in the global market is more closely tied to domestic production policy instead of foreign trade policy.  Stated more clearly, taxes and regulations play a larger role in international competitiveness than do tariffs and trade agreements.  As such, the proper policy prescription for encouraging competitiveness in the global marketplace is deregulation and corporate tax cuts.

Overall, Pop Internationalism starts with a bit of a bang, then dissolves into self-congratulatory mental masturbation.  The first couple of chapters are thoughtful and thought-provoking, but everything after that is nauseatingly narcissistic.  Read at your own peril.

Was the Industrial Revolution caused by Bourgeois Dignity or Institutional Change?

Most of Deidre McCloskey’s important new book serves to establish that if we want to explain the industrial revolution we need to explain why so much innovation occurred in England from the late 18th century and through the 19th century. She suggests that we should dismiss attempts to explain the industrial revolution in terms of such factors as thrift, accumulation of capital (physical or human), transport, geography, natural resources, the slave trade, business organization, imperialism, eugenics and even foreign trade.

The style of the exposition suggests, at times, that Deidre may not suffer fools gladly (or has a wicked sense of humour): ‘If someone claims that foreign trade made possible, say, economies of scale in cotton textiles or shipping services she owes it to her readers (as I have already said twice: I wish you would pay attention) to explain why the gains on the swings are not lost on the roundabouts. Why do not the industries made smaller by the large extension of British foreign trade end up on the negative side of the account?’ (p 221).

Well, I’m not sure Deidre, perhaps there is a link between international trade, specialization and scale economies – but you may have discussed that possibility somewhere else in the book when I wasn’t paying attention. In any case, I agree with you that innovation must have been a lot more important than scale economies.

Bourgeois Dignity: Why Economics Can't Explain the Modern World

I was a little more concerned that I didn’t see any recognition of the possibility, as discussed in Eric Jones’ recent book (reviewed here), that clustering of manufacturing in the north of England – as a result of trade and specialization within England – provided an economic environment conducive to subsequent innovations. Perhaps middle class enrichment resulting from trade and specialization could also help to explain why the bourgeois revaluation occurred when and where it did. (The bourgeois revaluation is the greater approval of the middle classes – and of innovation and markets – that began to occur in thought and talk in Holland and England three centuries ago.)

My main concern, Deidre, is that in attempting to clear the field prior to sowing a new crop of ideas (or the old ideas you want to propagate anew) you may be inadvertently slashing and burning some other ideas that are worth preserving. This applies, in particular, to the relationship between institutional change and economic performance as discussed by Douglass North (‘Institutions, Institutional Change and Economic Performance’, 1990). I agree with you that North could not have been correct in attributing the industrial revolution to more secure property rights following the Glorious Revolution. There is, however, more to institutional change than more secure property rights. I reject your attempt to dismiss appeals to institutional change as ‘still another attempt to reduce one of the greatest surprises in human history to a materialist routine’ and to claim that changes in institutions did not have much to do with the industrial revolution (p. 354).

In fact, evidence that you cite in your book seems to conflict with your claim that changes in institutions – the rules of the game – had little to do with the industrial revolution. You acknowledge that ‘the norms of antibourgeois aristocrats and clerics did discourage innovation’ (p. 267). You also suggest: ‘Had the Ottoman or the Qing empires or the Japanese Shogunate admired trade and innovation sufficiently to overcome their worries about the maintenance of state power – encouraging innovation and having a go rather than crushing it – then they, not the Europeans, would have come first’ (p. 371). You note that in France and Spain in the 18th century a nobleman caught engaging in commerce could be stripped on his rank’ (p. 387) and that in France it was necessary to apply to the state for permission to open a factory (p. 395).

I think your true position may be that bourgeois dignity and institutions (economic freedom) are both important in explaining the industrial revolution. This comes through fairly clearly when you write: ‘By adopting the respect for deal-making and innovation and the liberty to carry out the deals that Amsterdam and London pioneered around 1700, the modern world was born’ (p. 397). In such passages you seem to be offering an encompassing theory incorporating both bourgeois dignity and institutional change.

So far so good. I can understand that ideology (an amalgam of perceptions and values) influences the climate of opinion toward commerce and innovation which in turn influences both informal institutions (conventions and codes of behaviour) and formal institutions (regulations, laws, constitutions) which may or may not provide a climate conducive to innovation. Is that all there is to understand?

Perhaps not. The missing element is a sense of personal identity. As you say: ‘In truth, the agent wants to act because she attributes meaning to her life … She is a human with an identity, not a Max U calculating machine like grass or bacteria or rats’ (p. 307).

That gets me thinking again about identity economics – the idea of George Akerlof and Rachel Kranton that people gain utility when their actions conform to the norms and ideals of their identity (which I first discussed here). Even a person with great potential to be innovative might find that difficult if the norms and ideals of their identity dictated that any attempt to innovate would be futile. If we start thinking in terms of identity economics, however, we might have to question the sub-title of your book – perhaps economics can explain the modern world after all.

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Without a Net: Compromise versus Calculation

If we place the ongoing “purist”-”pragmatist” conflict within the libertarian movement under a metaphorical microscope, it immediately becomes apparent that what we’re looking at is not one conflict, but rather a bundle of conflicts composed of numerous intertwined disputes with overlapping intra-movement constituencies for particular outcomes. While the movement can be reasonably viewed as split between overall “purist” and “pragmatist” camps, the vast “No Man’s Land” between them is a constantly swirling milieu in which it’s not always perfectly clear who is shooting at whom — or why. Various constituencies raise their flags over specific coordinates and give battle, hoping to temporarily claim some patch of territory for their concern of the moment or, perhaps, to extend the lines of some larger alliance to encompass more of the disputed field.

The hill upon which I intend to raise my flag — the banner of the “purist” faction, broadly defined — in this paper encompasses the notion of “incrementalism.” Whoever controls that hill in turn overlooks, and may exploit, a key route across the plain of “realpolitik.”

May, I say, or might: The incrementalist high ground has been occupied, for some time and without substantial opposition, by “pragmatist” forces which have declined to actually sally forth versus the state, preferring instead to simply occupy it, hold a few grandiose parades on its slopes, and deny its use to “purists” who might actually use it as a base from which to strike real blows for liberty.

However, it’s come to my attention of late that the hill is only weakly occupied:

- Its garrison’s composition greatly resembles that of a Confederate “home guard” militia regiment during the Late Unpleasantness, as described by an inspecting general: “3 field officers, 4 staff officers, 10 captains, 30 lieutenants, and 1 private with a misery in his bowels.” To put it bluntly, for all their guff about holding the heights over the plain of realpolitik, the “pragmatists” have thus far proven themselves signally unsuccessful, to an even greater degree than the “purists” they disdain, at achieving political victories.

- The “pragmatist” garrison — which had at its disposal the heavy artillery of genuine incrementalism had it cared to use it — chose to mothball that formidable weapon and instead field a lighter piece, of shorter range and minimal power — one more suited to twirling, slapping and shouldering at ceremonies held for the purpose of congratulating themselves on their superior political acumen than for actual use in battle. The popgun I refer to is, of course, “compromise.”

The hill is, in other words, ripe for a bayonet charge. It is occupied by troops who are not interested in fighting, and who, if forced to, have at their disposal a weapon guaranteed to fizzle half the time and explode in its firer’s face the other half. It is the “purists” — unabashed and uncompromising libertarians who may differ on how far to go but who know which way they’re going — who have a rightful claim to, and know how best to exploit the advantages of, an incremental approach.

Forward, march.


Things are not always what they seem. For years, “pragmatist” reformers in the libertarian movement have exercised a virtual monopoly on advocacy of incrementalism, caricaturing “purist” abolitionism as its mutually exclusive opposite. Even a cursory examination of the two concepts, however, reveals that this is not necessarily the case.

Incrementalism involves setting (and achieving) incremental goals — taking “baby steps” in one’s chosen direction. Incrementalism is a proposed means.

Abolitionism is the notion that wrongs should be abolished rather than simply minimized (and, at the abstract anarchist extreme — no insult intended, that happens to be where I live myself — that all wrongs must be abolished in order for the abolitionist to claim victory). Abolition is a proposed end or set of ends.

It is certainly possible to conclude (and some “purists” do) that limiting issues advocacy to abolition, and only abolition, is an appropriate means (perhaps even the only appropriate means) to achieve abolitionist ends.

“Pragmatists,” in turn, have exploited the possibility of such a reification of abstract end into concrete means. By encouraging the erroneous conclusion that that reification is universal within and necessary to “purism,” they create two useful and reciprocally dependent misimpressions:

1) That incrementalist means are not available to “purists;” and

2) That incrementalist means are therefore only available to “pragmatists.”

The theory implied by these misimpressions disintegrates on examination. I could fill a book with the documentary evidence of that disintegration, but I don’t have to: Even one example of a theory’s failure invalidates the theory. I’ll provide two:

- I consider the claim that Alan R. Weiss is a “purist” and an “abolitionist” to be indisputable. He describes himself as an “anarcho-libertarian,” he writes for “purist” publications including Rational Review and The Libertarian Enterprise, and he has a long record of continuous association with “purist” associations and projects. In 2002, Weiss was elected to the Northwest Austin (Texas) #1 Municipal Utility Board. During his tenure on that board, he led a successful effort to reduce taxes associated with its operations by 50%, and then resigned. In other words, he used incremental means (seeking and gaining electoral office) to accomplish an incremental objective (cutting a particular tax rather than eliminating that tax or all all taxation), even though his strong preference would have been, and his ultimate goal is, the elimination of both the board to which he was elected and the retention by government of that board’s powers.

- If you don’t think I’m a “purist” and an “abolitionist,” then you haven’t been paying attention. I have personally engaged in incremental political action numerous times. I’d like to eliminate the US government. Having so far been unable to figure out a way to do so, I serve as an appointed member of a federal board so that I can affect its operations in a pro-freedom way. I’d like to eliminate my city’s government. Having so far been unable to figure out a way to do so, I have personally managed two (winning) campaigns to keep one of its public offices (city marshal) elected rather than appointed, and another (winning) campaign to elect a person (Tamara Millay) to serve in that office who discharged the duties of that office in a more liberty-friendly way than others might have been expected to.

QED, incrementalist means are not only available to “purists” and “abolitionists,” but used by them, and are therefore not available only to “pragmatists.”

Sadly, this issue should never have required the current argument. The de facto “pragmatist” monopoly on incrementalism, and their use of it as an anti-”purist” cudgel, has been made possible only by an inexplicable “purist” reticence toward contesting the matter. Nearly 30 years ago (at the latest!), “purist” icon Murray N. Rothbard — the bogeyman of the “pragmatists” — was already explicitly endorsing incrementalism:

[I]t is legitimate and proper to advocate transition demands as way-stations along the road to victory, provided that the ultimate goal of victory is always kept in mind and held aloft. In this way the ultimate goal is clear and not lost sight of and the pressure is kept on so that transitional or partial victories will feed on themselves rather than appease or weaken the ultimate drive of the movement. — “Strategies for a Libertarian Victory,” Libertarian Review, 1978

Must the libertarian necessarily confine himself to advocating immediate abolition? Are transitional demands, steps toward liberty in practice, therefore illegitimate? Surely not, since realistically there would then be no hope of achieving the final goal. It is therefore incumbent upon the libertarian, eager to achieve his goal as rapidly as possible, to push the polity ever further in the direction of that goal. Clearly, such a course is difficult, for the danger always exists of losing sight of, or even undercutting, the ultimate goal of liberty. But such a course, given the state of the world in the past, present, and foreseeable future, is vital if the victory of liberty is ever to be achieved. — The Ethics of Liberty, Part V: “Toward A Theory of Strategy For Liberty,” 1982

Not only do “purists” have a rightful claim to incrementalist means but, as we shall see next, “pragmatists” have severely undermined their own claim to those means by attempting to smuggle other, unsupportable, means into play under the rubric of incrementalism.


As we’ve previously seen, there is no real, defensible “pragmatist” monopoly on incrementalism. That the “pragmatists” have postured as the possessors of such a monopoly raises the question of why they are so interested in controlling the term and denying its use to “purists.”

The obvious answer is that incrementalism is a visibly worthy political tool. Insofar as the “pragmatist”-”purist” feud manifests itself in demonstrations (or at least protestations) of efficacy and success with the intent of recruiting libertarian newcomers to one side or the other, the side which can (even falsely) claim sole possession of such a tool benefits.

That there are less obvious answers is, well, less obvious. However, there’s good reason to believe that less obvious answers exist.

Assertion of a monopoly on incrementalism is simply not strictly necessary for the purpose of demonstrating efficacy and success. Such a purpose could be more effectively fulfilled by using incrementalism to build a record of electing public officials, winning referendum votes, etc., and then stacking up the results versus those achieved by the allegedly incrementalism-deprived “purists” for comparison. The “pragmatists” have avoided any such comparison — not only because it would explode their pretensions to a monopoly on incrementalism but because it would explode their implicit claim that they use incrementalism effectively, or for that matter at all.

The “pragmatists” have effectively used incrementalism as an advocacy cudgel in intra-movement disputes, but evidence that they’ve used it in, um, “real politics” is sorely lacking. The “pragmatist” case for primacy in the libertarian movement is a hodge-podge of horror stories about “purist” failure and grandiose projects of future victories which can be achieved only after the “purists” have been swept aside. What’s missing from that case is a portfolio of “pragmatist” successes: “We did this, and it worked.”

Why would a movement faction assert a (fake) monopoly on a tool it doesn’t even use? Why would it insist, contrary to fact and evidence, that its opponents don’t have that tool in their kit, even though those opponents have visibly and successfully used the tool numerous times? And why would it refuse to take that tool out of its own kit and visibly use it to tighten some bolts or drive some nails?

The answer is that the “pragmatist” version of incrementalism is a counterfeit tool. Its dark silhouette against the bottom of the toolbox drawer looks, in form, like the genuine article. But when pulled out and examined closely, it turns out to be a “drop-forged in Pakistan” fake. Deep down inside (in their pockets, next to the receipt for $4.95), the “pragmatists” know that their tool — compromise — won’t turn a bolt. And they know that if they pull out their shoddy instrument and hold it up next to the “purist” version, nobody who wants to turn a bolt will select theirs.

As defined above, incrementalism involves setting (and achieving) incremental goals — taking “baby steps” in the right direction.

Compromise, on the other hand, involves trading steps in the wrong direction for other steps in the right direction.

When pressed, many “pragmatists” argue that incrementalism and compromise are not only not mutually exclusive, but that they are actually indispensable one to the other. Suspicion on this point is natural, however, given the lengths of obfuscation to which the “pragmatists” have gone in order to avoid reaching the issue.

That suspicion is well-founded — for, as I shall demonstrate below, compromise destroys, rather than augments, the utility of incrementalism. To put a finer point on it, the inclusion of compromise as a means in libertarian strategy requires a radical and un-quantifiable re-definition of ends.


In the larger libertarian movement, the difficult question of end-states is a constant topic of discussion. Anarchist and minarchist factions do daily battle over the propriety of particular and general long-term goals. As a practical matter, however, the discussion has been framed in terms of “how to deal with a problem we’ll have to deal with later.”

The anarchist who wants to abolish the state entirely may disagree with the minarchist who wants to retain an ultra-minimal “night watchman” state, but they are able to co-exist beneath the “libertarian umbrella” because their goals are, for the most part, commensurable. While the minarchist might only cut government’s size, scope or power in a particular area by 80%, where the anarchist would cut it by 100%, both agree that pretty much every function of government should be slashed significantly.

Even if we posit a bigger “libertarian umbrella” under which other, additional groups might cluster, that commensurability is present. The geolibertarian and the constitutionalist may make exceptions in that which they subject to “libertarian measurement,” but those exceptions are defined exceptions. The constitutionalist may advocate a specific level of taxation for the specific purpose of “providing for the common defense.” The geolibertarian may argue that a community “ground rent” is not taxation as normally defined. And so on, and so forth.

These kinds of exceptions may be problematic, and they may raise questions as to which groups truly belong under the metaphorical umbrella or just exactly which piece of ground falls or should fall under that umbrella’s shade. What they don’t do, however, is make it impossible to answer those questions.

When compromise is introduced into a libertarian strategy, however, the quality of commensurability disappears, and with it the ability to define any particular end, let alone any end-state, as compatible or incompatible with libertarianism per se. More specifically, the “pragmatist” justification for compromise relies on the adoption of non-measurable or non-quantifiable goals.

While pro-compromise “pragmatists” are understandably shy about explaining their reasons for advocating something they don’t want to admit they are advocating, some cues and clues are available.
When “pragmatist” Brian Holtz states that he stands for “minimizing the overall incidence of coercion” or implicitly characterizes himself, in contrast to someone else, as advocating “the policies and tactics that have the highest expected value in terms of minimizing the net amount of aggression suffered by humanity,” we should pay close attention to exactly what he’s saying.

Ditto when Carl Milsted, head of the Libertarian Reform Caucus, asks “Why should I never endorse an action that employing [sic] aggression even it results in a substantial net reduction in aggression?”
For the sake of uniformity, I’ll refer to the goal which Mr. Holtz and Dr. Milsted implicitly hold out for adoption as “reduced overall net aggression.” It’s a fine-sounding goal, and one to which an approach of compromise lends itself well. Unfortunately, it’s also utterly impossible in most cases to determine whether, or to what degree, such a goal has been achieved.

Mr. Holtz, Dr. Milsted, meet Dr. Mises:

Judgments of value do not measure; they merely establish grades and scales. Even Robinson Crusoe, when he has to make a decision where no ready judgment of value appears and where he has to construct one upon the basis of a more or less exact estimate, cannot operate solely with subjective use value, but must take into consideration the intersubstitutability of goods on the basis of which he can then form his estimates. In such circumstances it will be impossible for him to refer all things back to one unit. Rather will he, so far as he can, refer all the elements which have to be taken into account in forming his estimate to those economic goods which can be apprehended by an obvious judgment of value — that is to say, to goods of a lower order and to pain-cost. That this is only possible in very simple conditions is obvious. In the case of more complicated and more lengthy processes of production it will, plainly, not answer. — Ludwig von Mises, Economic Calculation in the Socialist Commonwealth, 1920

The notion of “reduced overall net aggression” requires a system for classifying all of aggression’s varying forms into commensurable units. It’s relatively non-controversial to assert that picking a pocket is less onerous than assault, which is in turn less onerous than murder, but unitizing these forms of aggression for bulk comparison is a different story entirely.

Does it take 2.5 armed robberies to equal a rape, or 3.1?

Is the prevention of two murders a fair trade for 100 unreasonable searches?

Even when aggression is nominally measurable in known units, it’s not necessarily true that the factor of aggression itself will be perceived or valued in terms of those units.
If I can reduce the taxes of Person A by two dollars in trade for raising the taxes of Person B by only one dollar, is that a net reduction in overall aggression? What if Person A’s two dollars would otherwise have been spent on country club initiation fees while Person B’s one dollar would have otherwise been spent buying food for his starving child? Would the decrease in aggression versus Person A truly be commensurate with the increase in aggression versus Person B?

The value of a dollar may be uniform for certain purposes, but it is highly subjective for most. Most people would agree that stealing a piece of 18 holes on the golf course is less onerous than stealing a baby’s bottle of milk, even if the dollar values of the two say otherwise.

Even leaving such questions aside, precisely why should Person A accept an obligation to be aggressed against more, so that Person B will be aggressed against less, specious “overall net” claims notwithstanding? Under what moral calculus should anyone be considered fair game for aggression in any amount?

The unitization problem only grows worse on a political scale: For not only is it impossible to quantify the “amount” of Aggression X versus that of Aggression Y on an individual basis, but American polity deals with wholesale decisions which affect a population of 300 million individuals (excluding those outside US borders, who may also be affected).

The idea that some central “Pragmatic Libertarian Planning Board” could accurately forecast aggregate increases and reductions in the various forms of aggression spawned by particular policy compromises and compare them to reveal which actions would produce “reduced overall net aggression” is pure … well … I was going to say “science fiction,” but no science fiction author I know would touch the idea with a ten-foot pole. Sapient space-faring beer-drinking anarchist squid are one thing, but there’s a limit to the suspension of disbelief.

The commensurable characteristic which unifies libertarianism, however narrowly or broadly defined, is opposition to — not redistribution of — aggression. Assuming the burden of aggression redistribution would rip the fabric of the “libertarian umbrella.” Treating aggression as a commensurable, tradeable commodity would mean that some factions would be required to accept increased aggression on issues dear to them in order to “pay for” decreased aggression in areas held dear by other factions. No libertarian coalition could hold together under such stresses — it would fall to pieces as soon as the compromisers “traded” an increase in the top tax rate for legalization of marijuana, or vice versa, or whatever.

A single focus on institutionalized aggression, i.e. the aggression of the state, and a proposed solution of reducing — never in any case increasing — the ability of the state to aggress, are indispensable to the success (nay, the survival) of any broad-based libertarian political movement.

“Pragmatism” is popularly defined as an emphasis on that which “works.” Compromise does not, and cannot, work in the context of a libertarian political movement.