Monday 16 October 2017

Why I (and the market) are not worried about nuclear war with North Korea, and why Richard Thaler is wrong

Nobel Laureate Richard Thaler was recently reported as expressing bemusement about why global stock markets continued to levitate, and particularly given what he considered to be a material and growing risk of nuclear war. He noted:

"We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping.... I admit to not understanding it". 

To the extent Thaler's confusion about rising markets pertains to issues other than the North Korean nuclear threat (which is the focus of the rest of this piece), all I can say is this: perhaps it has something to do with the fact that global central banks have printed trillions of dollars worth of new currency and used it to purchase financial assets, and in the process drive down long term interest rates to the point where people cannot earn a reasonable investment return anywhere other than in the stock market? And perhaps it has something to do with the continuing US$170bn the ECB, BoJ, and BoE continue to collectively print monthly, despite their economies already (for the most part) growing at a decent clip? Perhaps that, Mr Thaler, has something to do with it? 

But what about the nuclear threat? Ironically (because Thaler has written about - and won a Noble Prize for his work on - market irrationality), I believe it is Thaler that being irrational here, not markets, and that the market's relative equanimity is in fact highly rational.* I also think the framework outlined below helps make sense of a number of otherwise bemusing events in the world, including the perennial antipathy non-Western despots have towards the West, and their incessant anti-Western propaganda.

The mental framework I use for thinking about the 'nuclear question' is this: why is it that so many despots from poor, rogue nations, have a seemingly inexhaustible appetite for nuclear weapons programmes that their countries can typically ill-afford? Is this some kind of Napolean complex writ large, or Freudian expression of some repressed childhood sense of inadequacy? No, to the contrary, it is entirely rational, and I will explain why (incidentally, if the analysis below appears depressingly cold, ruthless and amoral, then I concur with you and wish the world was not that way, but unfortunately it is, and wishful thinking accomplishes little).

Despots' #1 priority is to get into power and stay in power. In an ideal world, they would exercise some ethical restraint in the pursuit of that objective, but unfortunately political systems do not select for the ethical, but merely for those most effective at getting into power and staying in power.** Unfortunately, but quite naturally, this results in the most ruthless and Machiavellian rising to the top via an amoral process akin to natural selection. Gorbachev found himself in power in 1985 and tried to liberalise Russian civil rights, and relaxed constraints on the media. His reward? He was unceremoniously booted out of office and blamed for the USSR's disintegration. It took the ruthlessness of Putin before a Russian leader was once again able to secure a lengthy hold on power.

After coming to power, the first job of a despot who wishes to stay in power is to control domestic political threats. Co-opting the police and military is an obvious first task. Without them on side, a coup could happen at any time. The said incoming despot is practically forced to bribe them. If he fails to do so, they will likely use their physical might to remove the said despot from power (probably via execution to boot) and install a more 'co-operative' leader that would allow for the perpetuation of their privileges.

With the military and police bribed and on side, the next task is to use this monopoly on force to repress all domestic political opposition. This involves controlling the domestic media; clamping down on political freedoms; arresting, exiling, or executing vocal or potentially influential political opponents; and taking control - through bribery and coersion - of the judiciary. In addition, any necessary corruption of the electoral process must also be undertaken - at least if the illusion of democracy wishes to be maintained. Ideally elections will be won purely through state propaganda and the intimidation of political opponents into silence, but failing that, poll-booth voter intimidation and outright forgery of election ballots will do the job just fine.

With domestic threats contained, the despot's power is now likely secure for a very long time - well, almost. It is secure from domestic threats, but it is not necessarily secure from external threats. Unfortunately (for these despots), they live in a world where there are Western powers - most notably the US - who (1) like liberal democratic values and do not tend to look too favourably on the use of murderous repression to sustain political power; (2) are rich and militarily-powerful; and (3) have - from time to time - had a historical penchant for intervening in foreign nations' political affairs when it has been deemed expedient and in their national geopolitical interests to do so. For all the bluster, these despots are well aware that - at the end of the day - they serve at the US's leave, and could at any time wind up the next Saddam Hussein. The US military has the power to walk into almost any nation and topple its established government in a matter of days, and these leaders know it. Fear of US interventionalism is also behind Russia/Putin's strained relations with the West, in my view.***

If you think despots do not think about and fear this outcome obsessively, then you are wrong. Aside from domestic political threats, it is likely their number one preoccupation. And why wouldn't it be? US military action is the only thing that stands between a lifetime of wealth and privilege, and being dragged in front of a human rights tribunal, sentenced to life imprisonment, or even summarily executed. The personal stakes couldn't be higher.

So what is the best way to ward off the risk of a US invasion? Well, develop nuclear weapons! With a nuclear ballistic missile arsenal capable of reaching the continental USA (or even an important allied Western nation), you have a very important form of deterrence to the US tampering in your domestic political affairs. Furthermore, the deterrence will be most effective if the US believes that the leader of the said nation is crazy enough that - if provoked - he might actually use it! If that message is not conveyed, there is always a risk that the US would call the despot's bluff and invade anyway.

It's a risky ploy, of course, to start a nuclear programme, because you may simply succeed in inviting a pre-emptive strike from the US to thwart those very ambitions, and in the process hasten your regime's downfall. Whether or not Iraq ultimately did have WMDs, the point nevertheless stands and is well illustrated by Iraq and Saddam's 2003 experience. If it is believed by the US and its allies that a nuclear/WMD programme is underway, and that belief - rightly or wrongly - provokes an invasion, then your nuclear programme's goal of regime defense will have spectacularly backfired. However, once a nuclear weapon is perfected, you are pretty well secure thereafter, as henceforth, the credible threat of nuclear retaliation in response to an invasion will render any US intervention much too risky.

So how does one go about building nuclear weapons without provoking an interim invasion? One option is to try and build the weapons in secret. You wager that most members of the UN polity are pacifists and will prefer to not go to war, and so you plan that if you are discovered, you apologise; claim uranium enrichment was for the purposes of nuclear power projects only; agree to cease and desist; and acquiesce to routine UN weapons inspections. Meanwhile, you restart the programme in secret somewhere elsewhere and try to fool UN inspectors for as long as possible. Iran has tried this ruse many times.

Another intelligent option is to gauge the mood of the US electorate. Will US voters tolerate another war, and how far away is the next election? If another invasion is not politically feasible, then it is the perfect time to start a weapons program. Smart despots likely calculated that exactly such a situation existed in the aftermath of the disastrous Iraq war. It is not a coincidence that the world has witnessed a period of increasingly bold and expansionist dictatorships in the war's aftermath. Indeed, not only was post-Iraq a good time to start a weapons programme, but also a good time to invade another country, and Putin did not waste his window of opportunity, annexing Chimea after calculating - quite correctly - that the West had no appetite to go to war and so would likely fail to retaliate. I'm not sure when North Korea started on their nuclear programme, but I would not be at all surprised if it was in the post-Iraq years as well.

So here we are, with North Korea having an increasingly credible nuclear threat, and communicating loud and clear to the world that 'we are pretty damn crazy and may use this thing, so don't even try to fuck with us'. If this threat is taken literally and at face value - something Thaler appears to have done - then the risks do indeed appear grave and imminent. However, viewed in light of the above analysis, Kim's bluster appears much less intimidating. Indeed, it is likely that Kim Jong Un and/or his advisors are actually a lot smarter and more calculating than the world is giving him/them credit for, and that the North Korean regime has conveyed the message that Kim Jong Un is a little bit unhinged quite deliberately. It must be recalled, after all, that they are running the world's most successful totalitarian state at present, and it requires careful and intelligent calculation to seize and maintain absolute control over a country for multiple generations.

The good news is that Kim and his advisors are likely rational, and his motivation merely the deterrence of foreign interventions that could threaten his iron grip on power, rather than brinksmanship that leads the world into nuclear annihilation (and really, what would Kim personally have to gain from nuclear war? Nothing, and to the contrary, he would have everything to lose). Unless Trump does something monumentally stupid - a possibility that admittedly should never be completely ruled out - I think the world will be ok. The world, that is, if you happen to not be a North Korean citizen. They are the real losers here, as with the Kim regime acquiring ICBM capabilities, it will basically become impossible for the world to ever forcibly liberate North Korea.

For the rest of the world, the real threat nuclear weapons pose is not from North Korea, but from the risk of nuclear weapons ever falling into the hands of an extremist religious group with jihadist ideologies. I don't worry about the power-hungry tyrants; I worry about the religious zealots, because unlike the former group, the latter group are in fact irrational.


*Incidentally, Thaler's confusion about these issues highlights the problem with a lot of ivory-towered economic thinking: firstly, an excessive commitment to ideology prevents economists from seeing even obvious empirical realities within their discipline; and secondly, the lack of multi-disciplinary study and knowledge of history, politics, and both the hard and social sciences, makes it difficult to make sense of the world and complex issues that require more than simple demand and supply curves to appreciate. In my opinion, multi-disciplinary thinking is absolutely essential to good judgement, and is woefully lacking in today's world of narrow-minded specialists.

**It always amazes me why people are so surprised politicians are often slippery characters. If you think about it, how could they not be? How else to you get half of the country to agree with you at the same time - by bluntly telling the truth? Good luck with that.

***Putin's fears, by the way, are not completely unjustified in my opinion. Neither Putin nor dictatorship generally is popular in the West, and I'm sure Western leaders would be quite content to engineer his political downfall if given the opportunity. The US was also caught meddling in Ukraine's political affairs in 2013-14 with a view to helping install a pro-NATO government. Given this, I find all the hand-wringing at present about Russian meddling in the US election extraordinarily hypocritical.