The Return of Stagflation

By John Mauldin


I have been writing this letter for 22 years. 

Sometimes I look into the future and other times merely try to explain the present. 

Today I’m going to look at several possible futures. 

There are forces at work in both Congress and the Federal Reserve that could take us down radically different paths. 

There are also changes in the Zeitgeist, the way we act and think both in and as a society, that are going to have major impacts.

What I am not doing today is predicting the future. 

I am looking at events and saying if “this” happens we need to be prepared for it. 

I’m increasingly concerned we are in an economic situation with almost no wiggle room. 

We had serious issues before the pandemic which haven’t gone away. 

Massive fiscal and monetary stimulus obscured this reality, but can’t do so forever.

The late 2020 and early 2021 recovery was exactly that: a recovery from an exogenous event. 

It wasn’t new, organic growth—or at least not most of it. 

Moreover, the “exogenous” event is proving less than exogenous. 

We have wonderful vaccines, very effective in preventing severe disease and death. 

They help protect the people who get them, but the macro benefit is limited because they aren’t being administered widely enough and quickly enough. 

This limits global trade and travel, without which sustainable recovery is difficult.

Yes, we’ve learned to cope. 

We’re making adjustments but still a long way from normal. 

Much like the COVID-19 disease itself, the economy endured a severe acute phase followed by a chronic “long COVID.” 

The ongoing symptoms are less severe but still problematic.

Today we’ll explore all this and consider the possibilities. Longtime readers know I call the shots as I see them. 

Maybe I’m wrong but I fear we have consumed all the wiggle room. 

Now we need everything to go exactly right… and I have serious doubts it will.

Weaker Expansions

This year’s economy is built on top of last year’s, which was on top of the year before, and on back. 

It’s an iterative process. 

Nothing, not even COVID, wipes out the past. 

We keep feeling its effects.

So before we talk about future growth, let’s look back. 

I have said many times GDP has serious flaws as a growth measure, but it’s what we have. 

The bars in this chart are real GDP growth by quarter back to 1990, at a seasonally adjusted annualized rate. 

The gray vertical bars are recessions, of which there were 4 in this period.


Source:  FRED


I want you to look at the periods between recessions, what business cycle theorists call the “expansion phase.” 

Looking only at those (omitting the recession quarters), here is the average quarterly GDP (annualized rates) for the last three expansions.

  • 1991–2001:     3.6%
  • 2001–2007:     2.8%
  • 2009–2019:     2.3%

The last three expansion/recovery phases were each weaker than the last. 

Maybe that’s coincidence, but it matches a lot of other data showing “growth” isn’t what it used to be.

Remember how this is supposed to work. 

If you want, say, 3% average GDP growth over long periods, which you know will include recessions in which growth is zero or negative, math says the expansion phases need to average well above 3%. 

They didn’t do so over the 2 years before COVID struck. 

The last 21 years have seen sub-2% growth for the entire period.

However, in the four quarters since the COVID recession, growth averaged a stupendous 12.8%. 

If you go back another quarter and include Q2 2020 (which was -31.2%), it’s still 5.8%. 

In either case, GDP says we are now experiencing the most gangbusters expansion in decades.

Does that really make sense? 

Is it where the economy would be right now if COVID had never happened, and the 2019 trends continued? 

That’s just not plausible. 

Growth was only 1.9% in Q4 2019 and prospects for more looked pretty bleak at the time.

I and others were saying the mild growth was a consequence of Federal Reserve policy and would only get worse unless the Fed changed course. 

This is from my December 20, 2019, Prelude to Crisis letter. 

It’s doubly haunting to read now.

The Fed began cutting rates in July. 

Funding pressures emerged weeks later. Coincidence? 

I suspect not. 

Many factors are at work here, but it sure looks like, through QE4 and other activities, the Fed is taking the first steps toward monetizing our debt. 

If so, many more steps are ahead because the debt is only going to get worse...

Just this week Congress passed, and President Trump signed, massive spending bills to avoid a government shutdown. 

There was a silver lining; both parties made concessions in areas each considers important. 

Republicans got a lot more to spend on defense and Democrats got all sorts of social spending. 

That kind of compromise once happened all the time but has been rare lately. 

Maybe this is a sign the gridlock is breaking. 

But if so, their cooperation still led to higher spending and more debt.

As long as this continues—as it almost certainly will, for a long time—the Fed will find it near-impossible to return to normal policy. 

The balance sheet will keep ballooning as they throw manufactured money at the problem, because it is all they know how to do and/or it’s all Congress will let them do.

Nor will there be any refuge overseas. 

The NIRP countries will remain stuck in their own traps, unable to raise rates and unable to collect enough tax revenue to cover the promises made to their citizens. 

It won’t be pretty, anywhere on the globe…

Crisis isn’t simply coming. 

We are already in the early stages of it. 

I think we will look back at late 2019 as the beginning.

COVID was nowhere on the radar screen when I wrote that. 

A few weeks later it made the Fed intensify an already-loose policy stance while Congress passed gargantuan spending bills that sent the debt even further skyward.

These had initially beneficial effects, as seen in recent GDP numbers. 

The question now is how long those effects will last.

Back on Its Own

Hindsight is always 20/20. 

It’s easy to look back and say governments overreacted in the initial COVID crisis, both with economically harmful protective measures and added spending to mitigate that harm, but there was much we didn’t know at the time. 

I think they were right to err on the side of caution. 

The first massive stimulus was necessary; subsequent rounds were more questionable.

Necessary or not, the spending was truly staggering. 

Here’s a chart comparing the inflation-adjusted per-capita spending with two previous crises. 

In fiscal terms, we just lived through the equivalent of two New Deals. 

And instead of 10 years, it happened in less than two.


Source: The Washington Post


The scale and speed of this spending explains much, if not most, of the recent GDP growth. 

Putting an extra $14 trillion on top of normal government spending into a $20 trillion economy is a massive sugar high. 

It wasn’t a free lunch by any means; the national debt went up accordingly. 

But it still had a short-term stimulus effect.

The stimulus effect is now ending. 

The last round of $1,400 payments is either spent or banked. 

The extended and enhanced unemployment benefits ended this week in the states that hadn’t already canceled them. 

The small businesses who received payroll support are reaching the end of their rope.

Yes, Congress is considering a pair of infrastructure bills whose price tags, if they pass in the proposed form, will outweigh the prior COVID bills. 

But passage is increasingly dubious. (More below.) 

Even if they do, the spending will be spread over many years. 

It won’t come close to replacing the other programs that have ended, or will end soon.

For all intents and purposes, without more stimulus the economy is back on its own as the fourth quarter approaches—and basically where it was in late 2019. 

It may even be worse, considering changes to the workforce. 

Millions have died, become disabled, retired early, or are retraining for career changes. 

While this may be long-term positive in some cases, it’s not necessarily positive for the next quarter’s GDP.

Danielle DiMartino Booth at Quill Intelligence looked at data from Burning Glass Technologies, which analyzes almost every job posting in the country. 

It is amazingly comprehensive. 

I will quote one paragraph and then ask that you look at the data. 

But the point is the total job postings are essentially unchanged from January 2020. 

Danielle did highlight a few details.

Lucky for us, unlike some real-time data sets started after the pandemic, Burning Glass also provides weekly data job postings baselined in January 2020. 

That gets us from the JOLTS July data to The Conference Board’s August data to the week ended September 3rd, depicted in the bottom two charts above. In the aggregate, job postings are UNCH, up 0.1% (light blue line). 

But it’s the slicing and dicing by industry and educational attainment that’s most edifying. 

After peaking at +34.1% in the week ended June 11th, postings in Financial Activities (red line) are up a scant 0.7%. 

Meanwhile, after peaking in the week ended May 14th, openings for those with Extensive education (yellow line) are down by 17.7%, a level last seen in February .

At the opposite end of the spectrum, postings for those with Minimal education (purple line) are still up 30.1%; but they’re well off their July 16th peak of +75.1%. 

Leisure & Hospitality openings (orange line) peaked that same week at +46.5%; they’ve since fallen to +13.4%.


Source: Quill Intelligence


I find this simply astounding. 

Job postings requiring extensive education are down 17% and job postings requiring minimal education are up 30%. 

This isn’t the world we told our children about when we urged them to get college degrees. 

Other statistics show there is a great deal of complacency in the job search market among the unemployed. 

This is most strange given the higher wages being offered, etc.

Workers are clearly looking not just for higher wages but for better working conditions and higher wages. 

I’m not sure that will change for quite some time. 

We are in a wage-price spiral. 

Every region in this week’s Federal Reserve Beige Book highlighted the increased cost of labor. 

One line stuck out to me: A hotel firm raised the wages for their cleaning staff to $15 an hour. 

They noted the current staff was very pleased with the raise but it attracted no new workers.

Dangerous Assumptions

One serious downside risk is inflation. 

Economists talk about “nominal” and “real” GDP, the latter of which is adjusted for inflation. 

Higher inflation pushes real GDP lower. 

An economy showing 4% nominal growth and 1% inflation would have 3% real growth. 

Not so bad. 

But if nominal growth stays exactly the same but inflation rises to 4%, real growth would be 0%.

It gets worse. 

If nominal growth falls just a little, say from 4% to 3%, then a 4% inflation rate would push real growth down to -1% recession territory. 

A little bit of inflation can amplify a mild setback into a serious one in real terms.

I mentioned the 4% inflation rate because that is exactly where we are when we look at PCE (Personal Consumption Expenditures) inflation, the Fed’s favorite measure.


Despite that, the FOMC projects inflation falling toward 2% within just a few months, and below 3% today. 

Oops:


Source: FRED


CPI has run well north of 5% over the last six months. 

The Atlanta Fed’s wage growth tracker is now at 3.9% on its way to 4%. 

Newsweek reports national average apartment rents rose about 9.2% in this year’s first half. 

The average apartment in the US now costs $1,200 per month.

These things aggravate each other, too. 

Inflation pushes input costs (wages, materials, rent, etc.) higher. 

This can reduce output, and result in lower nominal GDP if common across the economy. 

With the Fed likely to reduce its asset purchases slowly, if at all, extended inflation in the 3% or higher range is entirely possible, and maybe likely, at least for the next year or so. 

(I am still in the long-term deflation/disinflation camp, but I also optimistically assumed the Federal Reserve would lean into inflation and take its foot off the gas pedal.)

This is only now beginning to show up in growth forecasts. 

We see it first in the non-subjective models that react faster than human forecasters. 

Here’s the Atlanta Fed’s GDPNow forecast as of Sept. 2. 

Notice how the green line (their model) turned down in late August. 

I expect it to turn down even more by the end of September. 

The Blue Chip consensus runs a little behind but I doubt it will retreat as fast. 

Then again, they are more often wrong than not, nearly always to the upside.


Source:  Federal Reserve Bank of Atlanta


Last week’s Human Capital Losses letter outlined why as many as 4 million people may no longer be considered part of the labor force, at least for now. 

That is almost 3% of the total labor force and since GDP is the number of workers times productivity it can be expected to be a 3% drag on GDP starting with the fourth quarter, unless an enormous amount of people come back to work. 

It’s certainly not in the data yet.

COVID has had labor force effects we are still struggling to understand. 

Whether it’s early retirements, health concerns, long COVID disability, a doubling of the number of homeschooling families, excessive government benefits, or (more likely) some blend of all those and more (like preexisting demographic trends), worker shortages limit output. 

Rising productivity can offset some of this, but not all. 

And maybe not fast enough to avert another recession.

Other things could help, too. 

We see significant new demand for certain products and services, as well as desire to rebuild inventory. 

Those would be positive for GDP. 

But they’re not assured and it is not clear how much they would help. 

Businesses are struggling to adjust.

The Human Infrastructure Wrench in the Gears

This is where I will get into trouble. 

The current $3.5 trillion infrastructure bill if passed as proposed would be a massive blow to the economy. 

You can’t raise taxes to the extent this proposal would and not expect a negative impact. 

And those are just the major tax increases. 

There are hidden cost increases all throughout the legislation.

Senator Manchin has said he will not support a bill of that size. 

Senator Sinema has also indicated she will not. 

My Washington sources say there is a number somewhere between $1 trillion and $1.5 trillion they might accept, which would raise capital gains and corporate taxes (along with personal taxes on higher incomes) to pay for the expenditures.

To further the plot, the government will run out of borrowing authority in the next month or two unless Congress raises or suspends the debt ceiling. 

It may end up being part of the infrastructure reconciliation bill. 

I have no idea how that would work out, but we will know soon.

I’m not really making a prediction here. 

These labor issues, inflation, and legislative maneuvering create a great deal of uncertainty. 

COVID and so much more will all be impacting the economy over the next few months. 

The market is currently priced for perfection. 

And admittedly, S&P 500 profits are through the roof. 

A lot of good is happening at the same time all of these issues are coming into play. 

If the problems I highlighted above are resolved in a positive manner, we could see the market explode to the upside.

My point is it’s exceedingly dangerous to assume the recent strong growth will continue into 2022 and beyond. 

COVID’s economic impact will remain significant but diminish as we all learn to deal with it. 

We are either going to return to the previous trends, which weren’t great, or see new trends form. 

If the latter, they could be different but not necessarily better.

These potential problems could develop into actual problems and recessionary conditions. 

The economy is way too close to stall speed. 

If the engines stop turning, your portfolio needs to be ready.

I am increasingly concerned that the Fed is toying with inflation and the economy could slow down more than they currently project. 

They are roughly projecting 2–3%+ growth and slightly above 2% inflation. 

That would be a very good outcome. 

I am more worried they are wrong, as they have often been in the past, and we’ll get the worst of both worlds: higher inflation and lower growth—in a word, stagflation.

Dallas and Optimism

The only trip I have actually scheduled is to Dallas for Thanksgiving with my family.

I really do expect to make more trips but they are just not planned yet.

As noted last week, I met with scientists in Palm Beach last weekend to talk about new antiaging medications, and their data blew me away. 

At some point I will be able to write about it. 

We are not that many years away from having therapies which will extend our health spans significantly.

I know my writing sometimes makes people think I’m bearish. I am the opposite. 

I have two very different core businesses, a publishing business and an investment management business. 

Along with my partners in both of those businesses, we are making aggressive plans to expand and grow.

I’m developing business plans for other more transformational healthcare/aging related businesses, and hope to push forward on those plans no matter what the economy holds in store for us. 

Opportunities don’t go away simply because we don’t live in the best of economic times. 

I will admit that I prefer to launch businesses in a significantly growing economy, but it is not required. 

What is required is management, capital, and vision. 

A difficult environment just means you need more of all three.

And with that, I will hit the send button. 

Have a great week!

Your planning on living a lot longer analyst,



John Mauldin
Co-Founder, Mauldin Economics

Go with the flows, part two

Rigid mandates and buybacks revisited

Robert Armstrong

    © Financial Times


Welcome back. 

There were loads of responses to the ESG piece on Tuesday, mostly positive, but I will pull the criticisms together and respond to them in Thursday’s letter. 

In the meantime, back to the slippery notion of supply and demand, and how it applies to stocks.

More on flows, stock prices, and buybacks (now with maths and charts)

I keep thinking about the academic paper I wrote about on Monday, by Xavier Gabaix and Ralph Koijen, describing how new money flowing into the stock market affects prices. 

Before I read it, I usually defaulted to the most common way of thinking about stock prices: that they are determined by rational expectations about future cash flows, or they are wrong, reflecting how dumb people are. 

Now I’m trying to think about stock prices as reflecting supply and demand, which feels simple and liberating. 

To recap. 

G&K reconcile two contradictory propositions, both of which most people who think about markets believe: 

One: Flows of money into stocks affects the price. 

It matters for prices when a lot of people take cash from outside the market and invest it.

Two: Every time someone buys a stock, someone else sells it. 

There are no flows “into” stocks. 

Someone always has the stocks, someone always has the money. 

As I said on Monday, G&K solve this riddle by defining an inflow as an investment into an investment fund that must be put to work in the stock market, and which was not funded by a stock sale. 

And their key insight is about that “must”. 

The great majority of stock market investment takes place though funds that have rigid mandates governing their mix of stocks and other assets. 

The result is that when they put money to work in stocks, the funds are price insensitive. 

Oddly, this means that $1 of flows can drive up the capitalisation of the stock market by a lot more than $1. 

Why? 

Here is a very, very simplified model for how this works (thanks to Ralph Koijen for walking me through this):

1. Suppose that there are only two funds that own stocks, and they own all the stocks there are (don’t you love economics?).

2. One is Pure Stock Fund, with a mandate that requires it to own only stocks; the other is Mixed Fund, which must have 50 per cent of its value stocks and 50 per cent in bonds.

3. There are 150 shares in the stock market, and they cost $1 apiece at the outset, making the capitalisation of the market $150. 

PSF owns 100 shares, and MF owns 50, plus 50 bonds, also at $1 apiece. 

There is also Pure Bond Fund; the size of its holdings is not relevant. 

4. Someone out in the world invests $1 in PSF. 

That dollar did not itself come from a stock sale. 

5. PSF must put that money to work in the stock market. 

The only place to buy stocks from is MF, so they buy 1 share from MF.

6. MF, new cash in hand, buys a bond from PBF.

7. PSF now owns 101 shares of stock. 

MF owns 49 shares of stock and 51 bonds.

8. (Here is the part you have to pay attention to) What is the constraint on the situation that determines the price at which MF will have sold that share? 

There is just one constraint available: MF’s 50/50 value mandate. 

In order for MF to sell and for the market to clear, the price must be one that makes the value of MF’s shares and its bonds the same. 

The bonds are still worth $51. 

So MF’s 49 shares must be worth $51, or $1.04 apiece.

9. There are still 150 shares outstanding. 

The market is now worth $156, $6 more than it was, because of that $1 flow. 

Weird!

There are not only two funds in the world, and not all investors have rigid mandates. 

This is just a toy model. 

But G&K’s point is the world is a heck of a lot more like this model than people think. 

In particular, they show empirically that most investment is through rigid funds, and potential arbitrageurs are too thin on the ground to provide much liquidity or elasticity, and usher prices back towards their fundamental value. 

So the mandates of blended funds turn out to be important to determining the multiplier of a given flow by which the market rises in value. 

Maybe it’s 3, maybe it’s 8, but it ain’t 0, which is what the classic model says. 

On the classic model, prices are based on expectations of future cash flows, which are unaffected by flows.

The G&K theory is a reasonably good match with historical data about flows and returns. Here are normalised log returns on the US stock market charted against flows (in G&K’s meaning of that term):


On Monday I said that the G&K model should make us reassess the importance of stock buybacks to the market. 

I included a chart showing that buybacks are a far bigger source of flows than mutual funds, ETFs and the like — with tech company buybacks leading the way. 

Several readers pointed out, rightly, that this was a rather dumb thing to say. 

What matters is net buybacks, that is, buybacks less share issuance. 

And tech companies in particular issue a lot of shares!

If there is clean data on net buybacks in the US market, I have not yet been able to find it (if you have it, send it!). 

So let’s start with some imperfect data. 

Here is the total share count of the S&P, as provided by Howard Silverblatt at S&P Dow Jones Indices:


The S&P’s share count hasn’t fallen much since about 2005, despite zillions in buybacks over that time. 

It’s only about 5 per cent lower than it was then. 

Now, this chart has been adjusted for Apple’s big 4-1 split last year, which would have made it look like the number of shares had gone up a lot. 

But it’s not adjusted for other splits, or for changes in the index’s constituents over time. 

Dozens of S&P companies did splits every year before the great financial crisis, accounting for much of the steep part of the blue line. 

In the past 10 years, though, its been about eight companies a year. 

I don’t know the size of those companies, but it’s reasonable to guesstimate that adjusting for splits, net buybacks are bringing the index’s share count down by a per cent or two a year. 

Under the G&K theory, that volume of inflows — if they are not matched by outflows from elsewhere — could account for very significant market appreciation.

Free exchange

A new theory suggests that day-to-day trading has lasting effects on stockmarkets

How economists are rethinking the fundamentals of finance


Economics is about supply and demand—just not in financial markets. 

A building block of asset-pricing theory is that the value of stocks and bonds is determined by their expected future payoffs rather than by ignorant trades. 

If an investor unthinkingly throws money at, say, shares in Apple, opportunistic short-sellers are supposed to line up to take the other side of the bet, keeping the share price anchored to where it ought to be, given Apple’s likely profits. 

Free money gets picked up and dumb money gets picked off. 

Markets are efficient, in that prices come to reflect genuine information about the future.

At this point your columnist may be in danger of provoking guffaws. 

It has been a bad year for the textbooks. 

Retail investors have driven up the prices of meme stocks such as GameStop and amc. 

Cryptocurrencies, the fundamentals of which cannot easily be analysed, have soared too. 

Even America’s bond market is a puzzle: the ten-year Treasury yield is only 1.4% even though annual consumer-price inflation has reached 5.4%. 

So-called “technical” explanations for market movements—“where you put things that you can’t quite explain”, according to Jerome Powell, the chairman of the Federal Reserve—are in fashion. 

So it is apt that an emerging theory of how markets work says that even random financial flows may matter a great deal to asset prices.

In a recent working paper Xavier Gabaix of Harvard University and Ralph Koijen of the University of Chicago study how the aggregate value of America’s stockmarket responds to buying and selling.

Researchers have studied flows before, typically finding noticeable effects as investors sell one stock and buy another. 

Messrs Gabaix and Koijen are interested in whether this finding scales up to move the market as a whole—a thesis that is consistent with the smaller-scale findings, but more provocative.

The first challenge is getting definitions straight. 

The financial press often writes about money flowing into stocks, but for a security to be bought, it also has to be sold. 

The authors’ definition of inflows relies on the fact that investment funds often promise to maintain a fraction of their portfolio in equities (a retirement fund offered by Vanguard, say, might offer investors 80% exposure to stocks and 20% to bonds). 

A flow into stocks is defined as an investor using fresh cash, or the proceeds of selling bonds, to buy funds that hold at least some equities. 

The higher the share devoted to equities, the larger the “flow”. 

The amount of securities in existence does not change—for every buyer, there is a seller—but their price is forced up until the value of the market is sufficient to satisfy each fund’s mandate to hold the target fraction of its portfolio in stocks.

Using statistical wizardry the authors isolate flows into stocks that appear unexplained (by, for example, gdp growth) over the period from 1993 to 2019. 

They find that markets respond in a manner contrary to that set out in the textbooks: they magnify, rather than dampen, the impact of flows. 

A dollar of inflows into equities increases the aggregate value of the market by $3-8. 

Markets are not “elastic”, as textbooks say they should be. 

Messrs Gabaix and Koijen therefore call their idea the “inelastic markets hypothesis”.

Does inelastic mean inefficient? 

A trader who could see flows coming would get rich quickly. (It has long been known that the so-called “front-running” of big trades, which is usually banned, is profitable.) 

But flows are hard to predict, says Mr Koijen. 

A true believer in markets might argue that unforeseeable flows are the mechanism by which the right price is reached, and reflect new information coming to the fore.

Even if flows are ill-informed, though, the opportunity to profit from them is small once they have already moved the price, says Mr Gabaix. 

And the arbitrageurs who are meant to keep the whole market anchored to fundamentals do not seem to exist. 

The authors note that at the onset of the global financial crisis hedge funds owned less than 4% of the stockmarket, and that their trades tended to amplify market movements, not dampen them. 

Funds are constrained by limits on leverage and by the fact that they must cope with the investments and redemptions of underlying investors. 

Different parts of the market do not trade much with each other, as would be necessary for markets to be elastic.

The paper will surprise the typical economist, who, according to the authors’ surveys, believes that flows do not affect prices. 

It also threatens associated financial theories. 

One is the Modigliani-Miller theorem, which says that it does not matter whether a company finances itself with equity or with debt. 

In inelastic markets, by contrast, a firm that issues debt to buy back its stock will find that it drives up both its own share price and the broader market. 

The authors look only at stocks, but other research suggests that bond markets are inelastic (albeit to a lesser degree). 

As a result, central banks’ quantitative-easing policies, under which they buy bonds, will affect bond yields—something that many traders take as given but that purists say should not happen.

Messrs Gabaix and Koijen hope to inspire research that explains market movements using the granular, observable choices of investors, rather than attributing gyrations in markets to unobservable changes in beliefs. 

And portfolio managers who typically try to forecast future business conditions might find it productive to try to predict flows into and out of investment funds instead.

Keynesian beauty

There may be an irony here. 

The authors do not study whether markets have become less elastic over time, but in recent decades funds that passively allocate fixed percentages to indices have grown in popularity, making their theory more plausible. 

The trend is a vote of confidence in markets’ efficiency, which should make the returns to active stock-picking low. 

Yet passivity may breed inelasticity—and therefore create opportunities for a canny investor who is ahead of the crowd.  

The First Libertarian?

by Jeff Thomas

 


Most libertarians count Murray Rothbard as one of their mentors. 

They will know that Rothbard’s primary mentors were Ludwig Von Mises and Friedrich Hayek. 

But Rothbard dug deeper in his search for libertarian thinking. 

Here is a little-seen paper that he wrote in 1967:

The first libertarian intellectual was Lao-tzu, the founder of Taoism. 

Little is known about his life, but apparently he was a personal acquaintance of Confucius in the late sixth century BC and like the latter came from the state of Sung and was descended from the lower aristocracy of the Yin dynasty.

Unlike the notable apologist for the rule of philosopher-bureaucrats, however, Lao-tzu developed a radical libertarian creed. 

For Lao-tzu the individual and his happiness was the key unit and goal of society. 

If social institutions hampered the individual’s flowering and his happiness, then those institutions should be reduced or abolished altogether. 

To the individualist Lao-tzu, government, with its "laws and regulations more numerous than the hairs of an ox," was a vicious oppressor of the individual, and "more to be feared than fierce tigers."

Government, in sum, must be limited to the smallest possible minimum; "inaction" was the proper function of government, since only inaction can permit the individual to flourish and achieve happiness. 

Any intervention by government, Lao-tzu declared, would be counterproductive, and would lead to confusion and turmoil. 

After referring to the common experience of mankind with government, Lao-tzu came to this incisive conclusion: "The more artificial taboos and restrictions there are in the world, the more the people are impoverished… The more that laws and regulations are given prominence, the more thieves and robbers there will be."

The wisest course, then, is to keep the government simple and for it to take no action, for then the world "stabilizes itself." 

As Lao-tzu put it, "Therefore the Sage says: I take no action yet the people transform themselves, I favor quiescence and the people right themselves, I take no action and the people enrich themselves…"

Lao-tzu arrived at his challenging and radical new insights in a world dominated by the power of Oriental despotism. 

What strategy to pursue for social change? 

It surely was unthinkable for Lao-tzu, with no available historical or contemporary example of libertarian social change, to set forth any optimistic strategy, let alone contemplate forming a mass movement to overthrow the State. 

And so Lao-tzu took the only strategic way out that seemed open to him, counseling the familiar Taoist path of withdrawal from society and the world, of retreat and inner contemplation.

I submit that while contemporary Taoists advocate retreat from the world as a matter of religious or ideological principle, it is very possible that Lao-tzu called for retreat not as a principle, but as the only strategy that in his despair seemed open to him. 

If it was hopeless to try to disentangle society from the oppressive coils of the State, then he perhaps assumed that the proper course was to counsel withdrawal from society and the world as the only way to escape State tyranny.

It would seem that little has changed in 2500 years. 

The drive by some individuals to control others is clearly a permanent condition in every era. 

The only remaining question is how to deal with it.

In my belief, the number of libertarians will always be few. 

Just as there will always be those who will stop at nothing in seeking to control others, the great majority of people will always respond like Pavlov’s dogs to the empty promise of greater security, in trade for diminished freedom. 

Even a country that begins with a people determined to control their own lives and create their own destiny will, over generations, succumb to the empty promises. 

The deterioration may take one hundred years, two hundred years, or even longer, but historically, every culture eventually gives way, bit by bit, to the empty promises and becomes completely dominated. 

In the end, each country collapses in economic ruin—the people having lost the desire to produce, as the leaders have bled them dry.

But there is one saving grace to this historical pattern. 

After a collapse, it all has to start over. 

Parasitic leaders become anathema. 

The country begins anew. 

Those who are productive lead the way, and liberty becomes the byword.

This being the case, anyone who is inspired to believe in the libertarian principle has two choices if he lives in a country that is in the final, most oppressive stages: he can either remain there, swimming against an overwhelming tide, or he can vote with his feet. 

He can seek out other locations—those that are in the early stages of development, where the residents think as he does, where he is not a threat to "the system" but, by being a libertarian, is actually swimming with the tide.

Certainly, as we can see above, this is what Lao-tzu concluded over 2500 years ago (and that was before his government had the ability to fly a drone over his house.)

Of course, today, we have more options than Lao-tzu. 

Not only is transportation so good that we can fly anywhere in the world, but the Internet keeps us posted on the information we need to learn of locations in the world that might suit our liking better than the one we presently reside in. 

There are unquestionably those out there who prefer to be proles—to accept an Orwellian existence. 

For those who do not—those of a more libertarian bent—the good news is that there are choices—many of them. 

A better life elsewhere.

Here are a few closing comments from Lao-tzu that I’m fond of, taken from his Tao Te Ching. 

They further exemplify the fact that the problem of the libertarian is perennial. 

All that remains is whether we have the wisdom to effect the solution—to seek out those locations in the world that offer a better alternative.

Those in power are meddlesome …

The greater the restrictions and prohibitions,

The more people are impoverished.

The more advanced the weapons of the state,

The darker the nation …

Thus the virtuous attend to contracts

while those without virtue collect taxes …

Act before things exist

Manage them before there’s disorder

Pax Americana Died in Kabul

The unraveling of the effort to build a democratic, secular Afghanistan will pose a far greater threat to the free world than Syria’s meltdown. The Taliban’s absolute power and links to global jihadism will sooner or later threaten US security interests at home and abroad.

Brahma Chellaney


NEW DELHI — The terrorist takeover of Afghanistan, following President Joe Biden’s precipitous and bungling military exit, has brought an ignoble end to America’s longest war. 

This is a watershed moment that will be remembered for formalizing the end of the long-fraying Pax Americana and bringing down the curtain on the West’s long ascendancy.

At a time when its global preeminence was already being severely challenged by China, the United States may never recover from the blow this strategic and humanitarian disaster delivers to its international credibility and standing. 

The message it delivers to US allies is that they count on America’s support when they most need it at their own peril.

After all, the Afghanistan catastrophe unfolded after the US threw its ally – the Afghan government – under the bus and got into bed with the world’s deadliest terrorists, the Taliban. 

President Donald Trump first struck a Faustian bargain with them, and then the Biden administration rushed to execute the military exit dictated by the deal, even though the Taliban had been openly violating the agreement.

The dramatic collapse of the Afghan defenses and then the government was directly linked to the US betrayal. 

Biden admits Trump “drew US forces down to a bare minimum of 2,500” in Afghanistan. 

By refusing to retain that small military footprint and by ordering a rapid exit at the onset of the annual fighting season, Biden pulled the rug out from under the Afghan military’s feet, thus facilitating the Taliban’s sweep.

The US had trained and equipped the Afghan forces not to play an independent role but to rely on American and NATO capabilities for a host of battlefield imperatives – from close air support, including drones for situational awareness, to keeping US-supplied weapon systems operational. 

Biden’s calamitous troop pullout without a transition plan to sustain the Afghans’ combat capabilities unleashed a domino effect, with 8,500 NATO forces and some 18,000 US military contractors also withdrawing and leaving the Afghan military in the lurch.

As former CIA Director General David Petraeus has explained, ever since US combat operations in Afghanistan ended on January 1, 2015, Afghan soldiers had been bravely “fighting and dying for their country” until the US suddenly ditched them this summer, mortally compromising Afghan defenses. 

This assessment is reinforced by the number of military deaths: Since the US combat role ended more than six and a half years ago, Afghan security forces lost tens of thousands of soldiers, while the Americans suffered just 99 fatalities, many in non-hostile incidents.

This is not the first time the US has dumped its allies – or even the first time in recent memory. 

In the fall of 2019, the US abruptly abandoned its Kurdish allies in northern Syria, leaving them at the mercy of a Turkish offensive.

But in Afghanistan, the US sowed the wind and reaped the whirlwind. 

Its self-inflicted defeat and humiliation have resulted from a failure of political, not military, leadership. 

Biden, ignoring conditions on the ground, overruled his top military generals in April and ordered all US troops to return home. 

Now, two decades of American war in Afghanistan have culminated with the enemy riding triumphantly back to power.

Whereas 58,220 Americans (largely draftees) were killed in Vietnam, 2,448 US soldiers (all volunteers) died over the course of 20 years in Afghanistan. 

Yet, the geopolitical implications of the US defeat in Afghanistan are much more significant globally than the American defeat in Vietnam.

The Pakistan-reared Taliban may not have a global mission, but their militaristic theology of violent Islamism makes them a critical link in an international jihadist movement that whips hostility toward non-Sunni Muslims into nihilistic rage against modernity. 

The Taliban’s recapture of power will energize and embolden other violent groups in this movement, helping to deliver the rebirth of global terror.

In the Taliban’s emirate, al-Qaeda, remnants of the Islamic State (ISIS), and Pakistani terrorist groups are all likely to find sanctuary. 

According to a recent United Nations Security Council report, “the Taliban and al-Qaida remain closely aligned” and cooperate through the Pakistan-based Haqqani Network, a front for Pakistani intelligence.

The unraveling of the effort to build a democratic, secular Afghanistan will pose a far greater threat to the free world than Syria’s meltdown, which triggered a huge flow of refugees to Europe and allowed ISIS to declare a caliphate and extend it into Iraq. 

The Taliban’s absolute power in Afghanistan will sooner or later threaten US security interests at home and abroad.

By contrast, China’s interests will be aided by the Taliban’s defeat of the world’s most powerful military. 

The exit of a vanquished America creates greater space for China’s coercion and expansionism, including against Taiwan, while underscoring the irreversible decline of US power.

An opportunistic China is certain to exploit the new opening to make strategic inroads into mineral-rich Afghanistan and deepen its penetration of Pakistan, Iran, and Central Asia. 

To co-opt the Taliban, with which it has maintained longstanding ties, China has already dangled the prospect of providing the two things the militia needs to govern Afghanistan: diplomatic recognition and much-needed infrastructure and economic assistance.

The reconstitution of a medieval, ultra-conservative, jihad-extolling emirate in Afghanistan will be a monument to US perfidy. 

And the images of Chinook and Black Hawk helicopters transporting Americans from the US embassy compound in Kabul, recalling the frenzied evacuation from Saigon in 1975, will serve as a testament to America’s loss of credibility – and the world’s loss of Pax Americana.


Brahma Chellaney, Professor of Strategic Studies at the New Delhi-based Center for Policy Research and Fellow at the Robert Bosch Academy in Berlin, is the author of nine books, including Asian Juggernaut, Water: Asia’s New Battleground, and Water, Peace, and War: Confronting the Global Water Crisis.