Daily Links: May 20, 2016

The Worst New Thing in the World
NATO has invited the Eastern European country of Montenegro formally into the alliance. This change is unlikely to make much practical significance on the ground. But it is important in a symbolic way in terms of the already tense US / NATO relationship with Russia. Montenegro was previously apart of Yugoslavia, which was a member of the Warsaw Pact during the Cold War. Thus, Russia tends to view NATO expansion as a provocation. Whether they should be concerned by this is perhaps a fair question, of course, but the fact they are concerned is more important. And for good measure, it’s worth noting that the US would obviously be hostile if Russia or North Korea formed a military alliance with Mexico.

Other Bad News
The Federal Reserve released minutes from its last policy meeting on Wednesday, sending shockwaves through the market. Investors look to the minutes to gain hints about whether and when the Fed is likely to raise target interest rates again. And in this most recent release, the Fed members strongly indicated that it might be occur as soon as June. This position went against prevailing investor sentiments which generally believe market / economic conditions are too weak for the Fed to raise rates that soon. The end result was that the markets fell over the last two days relatively sharply. So far this year, investors have generally been more accurate predictors of actual Fed behavior than the Fed’s own public forecasts.

This also offers an important warning for the Fed, but they’re between a rock and a hard place. If they raise rates, it’s likely that market volatility to rise even more and stocks will decline further. Since this is a metric that’s closely monitored, this would constitute pretty bad PR that President Obama and Fed Chairwoman Yellen would prefer to avoid. On the other hand, if they do not raise rates after making strong threats of doing so, the Fed’s credibility would be diminished further.

Finally, in case it’s not obvious, we should emphasize that the reason raising interest rates tends to lower stock prices (at least in the short-run) is because it is expected to decrease the amount of borrowing and the amount of money in the economy. Given that the economy has already showed signs of faltering, this would be an added headwind that could be devastating. If the economy were widely believed to be on so sounder footing, the impact of rate increases could theoretically have moderate effects. In the present environment, however, rate increases seem likely to end poorly.

The Silver Lining
Paul Ryan and Congressional Republicans have agreed with the Obama Administration to handle to the Puerto Rico debt crisis. More surprising, early indications are that it’s actually relatively good. Effectively, Puerto Rico will be managed as if it went into a special kind of bankruptcy–with creditors bearing the brunt of the losses. It also does not appear to guarantee any general taxpayer money to help Puerto Rico. If it goes through, it may make investors wary of buying bonds for US states that are struggling, not just Puerto Rico. However, from a libertarian perspective of course, that’s something of a win-win. All things equal, a government that is unable to borrow money is likely to be a relatively limited one.

(For a more thorough treatment of the Puerto Rico topic, also check out our recent piece on the subject.)

If You Only Read One (More) Thing
Check out this new piece at The Intercept about the funding sources that are trying to stop the legalization of marijuana in California. In particular, it notes that groups representing prison guards and police have been fighting legalization. This makes sense because it’s certainly in their narrow interest to keep pot at least partially illegal. It helps ensure the needless incarceration of many extra people, offering more job security to prison guards, and the drug war often makes liberal use of civil forfeiture–allowing banks to confiscate drugs and property of people who have not been convicted. Naturally the practice tends to be rather lucrative.

Thus, the article is a helpful reminder that government officials and organizations have interests of their own that won’t necessary match well with the interests of the citizens. Government is sometimes described romantically as the thing we do together–and in this narrative, government officials and politicians (at least, your member) are serving the public good. But in reality, they are still self-interested, just like everyone else. This doesn’t make them bad people; it makes them merely people. And it recommends a higher dose of skepticism when confronting the actions or positions of individuals in government, regardless of whether they’re politicians or not.

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