The Taliban’s Economic Inheritance

A Taliban fighter stands outside the Interior Ministry in Kabul, Afghanistan, August 16, 2021. (Stringer/Reuters)

The week of August 16, 2021: the ‘Islamic Emirate’s’ economic prospects, inflation, cryptocurrency, and more.

In a week when the administration’s handling of the Taliban’s blitzkrieg veered between denial and delusion, one of many low points was reached on August 11, when White House press secretary Jen Psaki was asked this question:

The Taliban is clearly on the march.  Your objective is to have a negotiated political settlement.  What gives you confidence that the Taliban is interested in that?

Psaki replied (in part):

The Taliban also has to make an assessment about what they want their role to be in the international community.  And I know that Ambassador Khalilzad made comments when he was at the political negotiations yesterday making clear that the international community is going to watch closely how the Taliban behaves.  They have a range of tools in their arsenal, as well, to take steps should they choose.

Leaving aside Psaki’s questionable view that there is an “international community” of any consequence and leaving aside the small matter that she may well have known that the Taliban’s triumph was inevitable (unconcerned by the keen gaze of the international community, the Taliban took Kabul a couple of days later), her response showed little recognition of the way in which the world has changed since the last time the Taliban was running Afghanistan. Then, its “Islamic Emirate” was recognized only by three countries, of which two were American, uh, allies: Saudi Arabia and the United Arab Emirates (UAE) and whatever it is that Pakistan may be. The U.N. did not recognize the emirate, and Afghanistan’s seat in Turtle Bay continued to be held by the now-exiled government of Burhanuddin Rabbani. The Taliban’s support for terrorism led to the introduction of U.N. sanctions toward the end of the 1990s.

Less than a decade after the Soviet humiliation at the hands of Afghanistan’s Mujahideen and facing Islamo-nationalist difficulties within its own borders, Russia had little time for the Taliban. Much of the rest of the world was simply repulsed by a regime that, in some ways, looked like the Khmer Rouge with a Koran. Concerns about the Uyghurs — its own Muslim minority — kept the Chinese at bay, although, over time there were signs of a warming toward Kabul. Indeed, China signed a memorandum of understanding with, intriguingly, the Taliban’s ninister of mines and industries, to upgrade economic and technical cooperation. It was signed on September 11, 2001.

That was then.

What will happen now will reflect the way that geopolitics has changed over the past two decades. Putin’s Russia is not Yeltsin’s Russia and is in no mood to make things easy for the U.S. But it is still not likely to look kindly on an extremist Islamist regime, particularly one bordering what (more or less) continues to be Moscow’s sphere of interest in Central Asia.

The Daily Mail:

Russian Foreign Minister Sergei Lavrov has confirmed that an armed resistance to the Taliban, which includes SAS-trained forces, in Afghanistan is forming in the Panjshir Valley. Speaking today, the Russian official also confirmed that the resistance force was being led by deposed Vice-President Amrullah Saleh and Ahmad Massoud, the son of a slain anti-Taliban fighter.

Reports claim that among the fighters headed to the region are members of the SAS-trained Afghan special forces, believed to be the best of the best that the Afghan military has to offer . . .

Lavrov also reiterated his call for an inclusive dialogue involving all political players in Afghanistan for the formation of a ‘representative government’. The Panjshir Valley northeast of Kabul is Afghanistan’s last remaining holdout, known for its natural mountainous defences . . .

Moscow has been cautiously optimistic about the new leadership in Kabul and is seeking contact with the militants in an effort to avoid instability spilling over to neighbouring ex-Soviet states. While the United States and other countries rushed to evacuate their citizens from Kabul, Russia said its embassy will continue to function.

Russian foreign ministry spokeswoman Maria Zakharova told reporters on Thursday that the Taliban are ‘actively restoring order’ and have demonstrated their ‘intent to dialogue’. She said at her weekly press briefing that the militant group – known for its severe treatment of women – is ‘ready to take into account the interest of citizens, including . . . women’s rights’.

Earlier this week, Russia’s ambassador to Afghanistan Dmitry Zhirnov met with the Taliban in Kabul, hailing on state television a ‘positive and constructive’ meeting. The Kremlin has in recent years reached out to the Taliban – which is banned as an ‘extremist’ group in Russia – and hosted its representatives in Moscow several times, most recently last month.

If that report is accurate, it implies that Russia is playing this latest iteration of the Great Game with appropriate cynicism — reaching out to the Taliban (not least, presumably, as a way to tweak the U.S.), but hedging its bets by making overtures to the most promising resistance group. I don’t think that’s what Jen Psaki had in mind when she said that the international community would be watching how the Taliban behaves.

Then there’s China, which appears to be taking an approach to the Taliban influenced both by realpolitik and the prospect of profit.

Before looking at that, it’s worth contemplating the financial situation that the Taliban will be facing. The good news is that Afghanistan’s central-bank reserves remain largely beyond the new regime’s reach.

Josh Lipsky and William F. Wechsler for the Wall Street Journal:

Among the thousands of refugees fleeing Kabul was the acting governor of Afghanistan’s central bank, Ajmal Ahmady. He tweeted his escape and noted that he was told Taliban fighters were going door to door demanding to know where he was.

It was clear why they were looking for Mr. Ahmady. His knowledge of the previous government’s financial standing would be valuable to the new regime. In addition to the funding from the opium trade and extortion schemes that fuel Taliban operations, the group thought it was positioned to inherit a large amount of cash from the International Monetary Fund next week.

Current estimates suggest there may be more than $9 billion in foreign-currency reserves on hold by the Afghan central bank. Over the weekend, Treasury officials assured Congress that these funds are held largely outside the country and can’t be accessed by the Taliban, and last week the Biden administration canceled shipments of cash that were headed to Kabul.

Turn to Ahmady’s Twitter feed to read that he estimated that “the accessible funds to the Taliban are perhaps 0.1-0.2% of Afghanistan’s total international reserves. Not much.” Well, no.

Ahmady added that “without [U.S] Treasury approval, it is also unlikely that any donors would support the Taliban Government.” That’s probably true so far as most are concerned. Others, notably in the Islamic world — and with the humanitarian exception set out below — may not be so fastidious.

Ahmady linked to this Bloomberg report:

The U.S. has frozen nearly $9.5 billion in assets belonging to the Afghan central bank and stopped shipments of cash to the nation as it tries to keep a Taliban-led government from accessing the money, an administration official confirmed Tuesday.

The official said that any central bank assets that the Afghan government has in the U.S. will not be available to the Taliban, which remains on the Treasury Department’s sanctions designation list. . . . U.S. sanctions on the Taliban mean that they cannot access any funds. The vast majority of DAB’s assets are not currently held in Afghanistan, according to two people familiar with the matter.

Ahmady tweeted (August 18):

I believe local banks have told customers that they cannot return their dollars – because DAB [the Afghan Central Bank] has not supplied banks with dollars This is true. Not because funds have been stolen or being held in vault, but because all dollars are in international accounts that have been frozen.

And:

Total DAB reserves were approximately $9.0 billion as of last week. But this does not mean that DAB held $9.0 billion physically in our vault. As per international standards, most assets are held in safe, liquid assets such as Treasuries and gold.

To be specific:

The major investment categories include the following assets (all figures in billions) (1) Federal Reserve = $7.0 – U.S. bills/bonds: $3.1 – WB RAMP [the World Bank]  assets: $2.4 – Gold: $1.2 – Cash accounts: $0.3 (2) International accounts = 1.3 (3) BIS [the Bank of International Settlements]= $0.7.

Ahmady noted that local Afghan banks have told customers that they cannot return their dollars. The reason for that? The central bank doesn’t have the greenbacks. That shortage is no surprise. Ahmady explains:

Given Afghanistan’s large current account deficit, DAB was reliant on obtaining physical shipments of cash every few weeks. The amount of such cash remaining is close to zero due a stoppage of shipments as the security situation deteriorated . . .

Unsurprisingly, the afghani (Afghanistan’s currency) has come under pressure. On August 14, the day before the fall of Kabul, noted Ahmady, the “afghani depreciated from 81 to almost 100 and then back to 86.” At the beginning of the year, the currency was trading at around 77 to the dollar.

Judging by Google (Friday afternoon), the afghani still stands at around 86 to the dollar (although the rate in the street must be very different from that). It has a lot further down to go.

I was surprised that the afghani had held up as well as it had this year, until I read this in the Wall Street Journal:

Afghanistan’s central bank has burned through nearly $700 million in foreign exchange reserves in the first few months of the year trying to prevent the country’s currency from collapsing, a circumstance that would spark hyperinflation, among other economic crises.

Ahmady’s base case:

– Treasury freezes assets

– Taliban have to implement capital controls and limit dollar access

– Currency will depreciate

– Inflation will rise as currency pass through is very high

– This will hurt the poor as food prices increase

That seems very plausible. As, with remarkable understatement, Ahmady put it:

Taliban won militarily – but now have to govern. It is not easy.

And the IMF is not coming to the rescue anytime soon.

The Wall Street Journal:

Afghanistan’s reserve accounts at the world’s emergency lender will swell Monday [August 23] by more than $450 million as part of a broader replenishment of bailout reserves at the IMF. As the de facto government, the Taliban could seek to tap that reserve, particularly as the nation faces a potential economic collapse.

But, the U.S., the IMF’s most powerful shareholder, is working to prevent that from happening, said the people familiar with the matter. Officially recognizing a country’s government as legitimate is a decision that the IMF’s collective membership would have to make. The lack of clarity on that matter, say former U.S. Treasury officials, will prevent the Taliban’s immediate access to the money.

The New York Times reported:

The International Monetary Fund said on Wednesday that it will block Afghanistan from accessing emergency reserves in the aftermath of the Taliban’s swift takeover of the country.

The decision came as the fund was scheduled to disburse about $460 million in emergency currency reserves to Afghanistan next week and followed pressure from the Biden administration to ensure that the reserves, known as Special Drawing Rights, did not reach the Taliban.

“There is currently a lack of clarity within the international community regarding recognition of a government in Afghanistan, as a consequence of which the country cannot access S.D.R.s or other I.M.F. resources,” Gerry Rice, an I.M.F. spokesman, said in a statement, adding that its decisions are guided by the views of the international community.

As noted above, the U.S. is the largest shareholder in the IMF. Say what you will (and I just did) about the “international community,” it can sometimes make a useful fig leaf.

But the fight over these reserves is not over.

Josh Lipsky and William F. Wechsler:

The first real test of whether the Taliban will be accepted by the international community will happen in the IMF boardroom. IMF recognition of the Taliban would accelerate its broader push for international recognition. But now, since recognition is frozen, banks all over the world will hesitate to do business with Kabul. This move provides the U.S. with leverage to negotiate with the Taliban as it seeks to evacuate thousands of foreigners and Afghan nationals who fear living under Taliban rule.

It’s hard to avoid the suspicion that a good number of those people are going to end up as bargaining chips, if perhaps not explicitly as the Taliban tries to balance preserving the myth that it is a “new Taliban” against the value of a tradeable asset.

Lipsky and Wechsler:

Stopping the Taliban from receiving SDRs forever won’t be easy. Bad actors often get IMF money—look at Belarus. But the U.S. can use precedent set with Venezuela in 2019 and Myanmar in 2021 to argue that there should be no IMF recognition of the new government for months or even years.

China and Russia will likely resist such a move, but this is a fight worth fighting, both for the U.S. and the IMF. If the U.S. is successful, the Biden administration can set an example for how the world should treat the Taliban in the months ahead. Everything should be put on hold until the dust settles in Kabul, the evacuations are complete, and it becomes clear what policies the new leadership will pursue . . .

Meanwhile, the Wall Street Journal reported:

The U.S. government has sanctioned the Taliban as a terrorist organization, as have the U.N. and European Union. The Taliban’s seizure of the Afghan organs of state in Kabul effectively extends those sanctions to those institutions, some former Treasury officials and analysts said.

Because foreign banks and firms conducting transactions with the Afghan government now risk being penalized for doing business with the Taliban, cross-border trade and finance is expected to come to an abrupt halt, those people said.

“Taxing” cross-border trade, or more often, the internal transit necessary to facilitate it, has been a useful source of Taliban revenue.

Another powerful economic weapon that some former Treasury officials said is under consideration is declaring the entire country a sanctioned jurisdiction, as Washington has done with North Korea and Iran.

What lies immediately ahead looks to be, as Ahmady predicts, financial collapse and food shortages. This, especially the last, will be a challenge to the new regime. The Taliban are now responsible for many more people than in 2000 — the year before they were driven out of power before. Then the population stood at a little under 21 million. Now it is over 39 million. There are many more mouths to feed.

Historical precedent, however, from early Soviet Russia to North Korea, would suggest that the West will help out in the event of a profound humanitarian crisis, even if the inescapable consequence will be to keep a despotism in power.

Looking further out — and assuming the new regime survives its first few months — it is possible to see how, even with pariah status in the West, and the restrictions that come with that, the Taliban will build an economic model that will allow its revived emirate to endure, if not easily. It is an indication of the challenge that the Taliban faces that in 2018, almost 80 percent of Afghanistan’s $11 billion in public expenditure came from donors, the overwhelming majority of those Western. Even if much of that financial support — some $4.8 billion — was designed to protect the former government against the Taliban and thus will not, by definition, be required any longer, the “civilian” economy is still wildly out of kilter, with perhaps half of the government’s revenues coming from foreign (again mainly Western) aid.

The numbers are anything but precise, but in 2019 the World Bank estimated that Afghanistan

would require $6 billion to $8 billion a year in international grants between 2020 and 2024 to fund basic services, support faster economic growth, and consolidate and sustain any potential reduction in violence following a political settlement with the Taliban.

Those estimates were prepared on the assumption that the Taliban would be part of a settlement, not that they would be the settlement.

It is impossible to imagine anything like these levels of Western support continuing if the Taliban imposes anything resembling the agenda it clearly has in mind. The attitude of the U.S is clear enough. That of the EU is not so different.

CNBC:

The European Union has suspended development funding to Afghanistan after the Taliban seized control of the war-torn country.

The news comes as European leaders focus on evacuating Europeans from Kabul, as well as Afghans who have helped the bloc over the past two decades.

Germany and Finland announced Tuesday that they were stopping development aid for the time being. Later in the evening, the EU’s foreign affairs chief confirmed the wider move to stop funding.

“No payments are going on to Afghanistan right now. No payments of development assistance until we clarify the situation,” the EU’s Josep Borrell said.

“We have to see first what kind of government the Taliban are going to organize,” he told reporters.

The EU promised in November to donate 1.2 billion euros ($1.4 billion) over the next four years in long-term and emergency assistance. These funds were conditional on Afghan authorities preserving democratic pluralism, the rule of law and human rights.

Oh.

Other Western donors will take a similar approach.

The Taliban’s leadership may make some concessions to win some Western aid, but they are unlikely to be convincing or enough. They believe what they believe, and their God is not one for wriggle room. What’s more, a totalitarian regime is better equipped to deal with the discontent of an impoverished population than its democratic counterparts, elections not being a thing.

If the Taliban is forced into — or opts for — something like autarky, life won’t be comfortable. Much of their funding has been essentially parasitic, levying “taxes” off the economy either built or enabled by the U.S. If that economy withers so will the revenues that flow from it. (For an argument that these inflows might be more resilient than I assume, take a look at this piece in the New York Times by Graeme Smith and David Mansfield.)

Whoever is right, I suspect that certain cash crops will continue to find strong demand.

In a broader discussion of the Taliban economy for the Financial Times (which is well worth reading), Stephanie Findlay notes:

Poppy cultivation has actually grown over the two decades and was up 37 per cent in 2020 from the previous year, according to a UN opium survey. The Taliban tax the drug harvests, though analysts debate the degree that they are actively involved in the trade.

Speaking this week at a press conference, Taliban spokesperson Zabihullah Mujahid insisted the movement wanted to eschew drugs and “revive our economy”.

“Afghanistan will from now on be a narcotics-free country but it needs international assistance. The international community should help us so that we can have alternative crops,” he said on Tuesday.

The unspoken quid pro quo lurks there in the statement, but even the architects of our “withdrawal” from Afghanistan could not be as slow-witted as to believe that the Taliban would stick with their side of any such bargain.

And:

Proceeds from the production of methamphetamine, a powerful narcotic, have also grown in recent years — and by some estimates now rival the country’s production of opiates.

The ephedra plant that grows wild in Afghanistan’s central highlands is increasingly used to produce methamphetamine, the European Monitoring Centre for Drugs and Drug Addiction said late last year.

Oh.

Methamphetamines are a higher margin enterprise than opium. Walter White would be unsurprised.

As an indication of how murky this business is, the Wall Street Journal reported that

The Taliban’s sales surged after it retook a key heroin smuggling hub into Pakistan from a local Islamic State franchise, after joining in an offensive with Afghan and U.S. forces, the U.N. said in a report last year [2020]. ISIS had opposed the cultivation of poppies needed to produce the narcotic . . .

It should be added that ISIS and the Taliban have been at loggerheads for years, with the Taliban particularly resenting ISIS’s incursions into Afghanistan.

One place where Afghanistan’s new rulers may look for assistance is China, which is clearly open to recognizing a Taliban government and would be unconcerned by its repressive nature. In exchange, Beijing will insist that the Taliban close down an Uyghur-jihadist group present in the east of Afghanistan, and do nothing to support the Uyghurs in China itself — a comparatively small ideological sacrifice compared with what the West would ask, and with which the Taliban appears to have little difficulty. A related trade, also reflecting the realities of both geography and politics, would involve Pakistan, in which China has invested roughly $60 billion in various infrastructure projects, collectively regarded as part of CPEC (the China–Pakistan economic corridor). These help link China to the Indian Ocean, and thus form a key part in Beijing’s Belt and Road Initiative.

China has a strong interest in seeing that its investment in Pakistan is not threatened by the Islamist triumph in Afghanistan. However, Bloomberg reports that

emboldened by Taliban gains across Afghanistan this year, terrorist groups have already targeted China — in Pakistan. In April, a car bomb exploded at a luxury hotel hosting Beijing’s ambassador in Quetta in an attack claimed by the Tehrik-i-Taliban Pakistan, or the Pakistani Taliban, a loosely organized terrorist group with ties to al-Qaeda, based along the vast Afghan-Pakistan border. Then last month, an attack in Dasu near the Pakistan border with China killed 12 people, including nine Chinese citizens.

As part of any understanding with Kabul, Beijing will expect the Afghan Taliban to restrain — or more realistically, at least not assist — their counterparts across a very porous border.

Writing for NR, Arthur Herman has highlighted something else that the Taliban can (presumably if it can get over the traditional Afghan distaste for any foreign military presence) offer China: the Bagram air base that the U.S. so carelessly abandoned:

It has a 12,000-foot runway that can accommodate any aircraft in the Chinese military arsenal. Bagram is, however, far more than an air base: For two decades, it’s been the headquarters of the U.S.–NATO war effort, including intelligence-gathering. Only 283 miles from Islamabad and 437 miles from Kashmir, Bagram is a watchtower and a platform for projecting power against India and across the region. Baghdad (1,919 miles), Tehran (1,006 miles), and Dubai (1,046 miles) will be only an hour or two away for China’s most advanced stealth aircraft, the J-20, operating at cruising speed. Bagram’s complex of airfields could also become a major hub in Beijing’s plans for an airborne version of its One Belt One Road Initiative, linking airports around the region — even as U.S. influence shrivels . . .

And (potentially) there’s money to be made too, both for the Taliban (which will need it) and China (which will appreciate it).

The Financial Times:

Senior Asian diplomats who declined to be identified said Beijing was willing to stump up hundreds of millions of dollars to finance the reconstruction of critical infrastructure in Afghanistan. Chinese investments in resource projects could potentially follow a restoration of order to Afghanistan’s economy, China experts said.

Resource projects?

Reuters:

Aug 19 (Reuters) – Returning to power in Afghanistan after a 20-year absence, the Taliban have regained control of natural resources that a former mines minister of the country once said could be worth up to $3 trillion [the US estimate at the time was an amount in excess of $1 trillion].

That estimate was made toward the end of the last commodities supercycle in 2010 and could be worth even more now, after a global economic recovery from the coronavirus shock sent prices for everything from copper to lithium soaring this year.

Afghanistan is rich in resources like copper, gold, oil, natural gas, uranium, bauxite, coal, iron ore, rare earths, lithium, chromium, lead, zinc, gemstones, talc, sulphur, travertine, gypsum and marble . . .

Not bad. And China, I am sure, would appreciate being able to mine for them in a country where the ecological standards are unlikely to be demanding. And doing so would bring strategic as well as financial advantage.

Lithium is, of course, essential in rechargeable batteries. It’s not scarce, but current sources of supply cannot match rapidly rising demand. Afghanistan is thought to have one of the world’s largest deposits of this metal. But I would also focus on rare earths, an area of considerable interest to China (and vulnerability for the U.S), as Steve Hanke has written for Capital Matters.

An extract:

The Financial Times broke an important story on February 16 in which it detailed how China is drawing up plans to disrupt the U.S. defense industry. Not for the first time, it seems that China is considering using its control over rare-earth metals that are crucial for the production of many weapons, including the F-35 fighter jet, to cause difficulties for the U.S. To put this in context, an F-35 contains 417 kilograms of valuable rare earths — minerals over which China has a virtual choke hold. Just what are rare earths? They cover 17 important elements in the periodic table, including many elements that are not household names, such as Dysprosium, Praseodymium, and Ytterbium.

And that’s not all. China has an outsized dominance in what I term the Three Ms: 1) Mining and Mineral Engineering, 2) Metallurgical Engineering, and 3) Materials Science and Engineering. When it comes to rare earths and the Three Ms, China is fully aware of just how strategically important their position is . . .

More from Steve on this topic here.

Meanwhile, Arthur Herman:

China’s interest in Afghanistan fits nicely in the One Belt One Road Initiative, its broader strategic plan for Central and South Asia. Beijing’s construction projects have already made Pakistan virtually a Chinese colony; the next logical step will be to make Kabul a hub in China’s massive $250 billion global infrastructure and investment plan. Beijing has been offering its help with construction of the Peshawar–Kabul motorway, which would connect Pakistan to Afghanistan [Peshawar is connected to CPEC].

Beijing is also building a major road through the Wakhan Corridor, which connects China’s westernmost province of Xinjiang to Afghanistan. These new thoroughfares should enable Beijing to pursue its goals of increased trade with the region but also of getting hold of Afghanistan’s strategic natural resources.

If I had to guess, China may be more hesitant about making the long-term commitment (and developing rare earth and lithium mines takes a long time) to projects in such a dangerous and chaotic country than Herman might be implying. China’s cautious track record in Afghanistan (notably the suspension of a vast copper project not far from Kabul) would suggest that it will not be in a hurry to invest too much just yet, despite the new opportunity represented by the American departure. Nevertheless, the prospect of merely making “blocking” investments in Afghanistan purely to stop the U.S. from developing alternative sources of supply of rare earths might well be one that Beijing cannot resist.

Somehow, I think that if the Taliban can hang on, significant sections of the “international community” (and not just China) will — whatever Jen Psaki might hope — be sufficiently taken with the economic and strategic opportunity its emirate may offer to overlook its horrors.

And can the Taliban hang on? I don’t know, but I do know that a very severe economic challenge is headed its way.

The Capital Record
We released the latest of a series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the 31st episode David hosted Fed economist and monetary-policy adviser Danielle DiMartino Booth, founder of Quill Intelligence, and gives her the opportunity to sound off on a whole host of things about the current world of central banking that she does not like.

And the Capital Matters week that was . . .

Climate

Benjamin Zycher:

Let us now recall the blessed memory of Stalin-era airbrushing, the totalitarian effort to rewrite history by removing once-favored then-disfavored individuals from official memory. Modern modes of Internet communication have made such dark creativity instantaneous — a few keystrokes yield a brand-new history, however difficult to defend given the long memory of the Internet — but it remains every bit as crude and supremely amusing.

Which brings us to the recent decision by the Climate Leadership Council to “suspend” ExxonMobil, one of the Corporate Founding Members of the CLC in June 2017. One would think that the historical identities of the “corporate founding members” would be immutable; they were whoever they were. Alas, one would be wrong: ExxonMobil is no more and ostensibly never was a “corporate founding member” of the CLC, the incontrovertible evidence to the contrary notwithstanding. Does the CLC view this ruse as subtle?

As a display of cynicism and dishonesty, this is among the smaller of the myriad mendacities promoted by the CLC, which describes itself as an organization “laser-focused on promoting effective, fair, and lasting climate solutions.” . . .

Andrew Stuttaford:

There are so many delusions running through the Biden administration’s climate agenda that it seems unfair to pick out just one for discussion today, but there will be other opportunities on other days, and so today it’s worth taking a quick look at the idea that this agenda will, as a whole, create jobs on, to use a possibly unfortunate word, any sustainable basis. That’s not to deny that some sectors will benefit. There will, for example, be plenty of openings for bureaucrats and enforcers of many descriptions. Some of those jobs will be well rewarded: command-and-control is like that.

To believe that overturning much of the basis on which our market economy has been run (and doing so in a relatively short period) will lead to an employment bonanza is either delusional or very, very optimistic. The same can be said about those who peddle the idea that this happy outcome lies ahead, although there are plenty of other considerably less polite adjectives that could also be used to describe them.

Those adjectives might be heading climate warriors’ way rather sooner than some might like . . .

Monetary Policy

Peter Earle and William Luther:

By limiting redemption, the Bretton Woods system significantly curtailed the historical check on over-issuing paper money. Prior to the creation of the Federal Reserve system, private state-chartered and then national-chartered banks issued redeemable banknotes. These banks were contractually and legally obliged to pay the bearer on demand. Under this system, an over-issuing bank would see its notes spent and then deposited in other banks. These other banks, in turn, would bring the notes back to the over-issuing bank or common clearinghouse for redemption. As a result, the over-issuing bank would suffer adverse clearings and, hence, lose gold reserves to other banks. Lest it soon find itself without reserves, the over-issuing bank would be forced to correct. And, recognizing the consequences of over-issuing in advance, banks would try to avoid the prospect altogether.

Lacking an effective redemption mechanism, the Bretton Woods system permitted the U.S. to issue more notes than it could reasonably be expected to redeem. And the U.S. did just that. Increased expenditures during the Vietnam War and President Johnson’s Great Society programs saw the U.S. create more and more dollars and, correspondingly, find it more and more difficult to honor its commitments under the Bretton Woods system. Nixon cited growing inflation and instability as reasons to end the gold-exchange standard. But the fateful decision was to move toward a fiat monetary system rather than return to a genuine gold standard . . .

Inflation

Casey Mulligan:

President Biden’s policies, actual and aspired, have and will impose many harms on American citizens. Inflation is harmful too, but most of the blame for that lies elsewhere.

President Biden’s agenda includes historically large amounts of redistribution from workers to those out of work and to members of politically connected organizations from those out of favor. Such policies reduce work, investment, productivity, and ultimately our living standards.

Controlling inflation is largely the responsibility of the Federal Reserve, which is legally independent of both the president and Congress. Inflation is, by definition, the rate of decline of the value of a dollar — a “Federal Reserve Note” as it says above George Washington’s portrait. The value of a dollar is determined by the supply and demand for those notes relative to the goods and services produced in the economy . . .

Eric Grover:

Despite a few recent hints of unease, the Fed still maintains that the current surge in inflation is “transitory.” That seems optimistic: The central bank has been stoking inflation and is stubbornly blind to the danger of getting more than it bargained for, of letting loose what Nobel Prize–winning economist Friedrich Hayek described as the “tiger.”

Fed chairman Paul Volcker caged inflation after it’d crested at 13.5 percent in 1980. Since then, however, the Fed, politicians, consumers, and producers have become complacent about the risk that it might escape again.

The current cocktail of money-printing, massive deficit spending, pandemic-related supply-chain disruptions, and pent-up demand coming out of COVID-19 hibernation means inflation ahead — and not just for the short term. The outlook is only made worse by the hit to the supply side that will come from increased regulation and taxes, not to speak of the boost to energy costs that will flow from the administration’s hostility to fossil fuels . . .

Ramesh Ponnuru:

Whether the elevated inflation readings of the last few months will prove “transitory” has been the main subject of comment about them. It’s understandable that we want to know how long we will be going through the pain and disruption of this burst of inflation, and I’ve written about that question myself. But it’s worth keeping in mind that the extent to which this inflation is transitory is not directly relevant to the debate over macroeconomic policy. What matters for that debate is the related but distinct question of what’s causing this increase in inflation.

If the cause is mostly monetary factors — an increase in the money supply or a decrease in demand for money balances — that’s an indication that the Federal Reserve may need to tighten monetary policy. If, on the other hand, it’s mostly supply disruptions, then tightening would compound the problem of lost output from those disruptions. And tightening in response to negative supply shocks would be a mistake even if such shocks continued indefinitely . . .

Markets

Sami Karam:

The market is now in a sort of purgatory because the pandemic in the U.S. is over and not over at the same time. It is mostly over for the vaccinated, but it is still raging among the unvaccinated because of the Delta variant. If we were still in a full-fledged pandemic, the market would be selling off hard as it did in March 2020. And if we were completely past the pandemic, the market would resume the sharp sector correction from growth to value names, from technology and pharma into “reopening” plays such as travel, retail, and energy. But we are in neither place today. Instead, we are in a purgatory between pandemic and post-pandemic, without being completely in either. For this reason, growth and meme stocks that rode the liquidity tsunami of 2020–21 are now showing new vigor, with investors hoping for another giant wave. Meanwhile, since the spread of the Delta variant in the U.S., many of the reopening stocks that had performed strongly after the vaccine announcements of last November have retrenched by 10, 20 percent or more . . .

Woke Capitalism

Veronique de Rugy:

A few months ago, I wrote a piece for National Review about woke capitalism as part of a symposium on the issue. In my article, I laid out a case of optimism. It was a timid case, to be sure, but one of the arguments I made was that it is likely that “woke capitalism is nothing more than costless virtue-signaling.” In other words, corporations talk a big game, make big statements, and take actions with zero consequences for their bottom lines.

The Wall Street Journal has a piece today by Lucian A. Bebchuk and Roberto Tallarita that suggests I may have been onto something:

“Corporate leaders have been busy presenting themselves as guardians of the interests of “stakeholders,” such as customers, employees, suppliers and communities as well as shareholders. Our recent research, however, casts serious doubt on whether corporations are matching the talk with action . . .

Cryptocurrency

Steve Hanke:

In the middle of the night of June 8, El Salvador passed a law that made Bitcoin legal tender. The Bitcoin Law is the brainchild of El Salvador’s populist president, Nayib Bukele. Its most controversial feature is Article 7, which stipulates that every economic agent in El Salvador must accept Bitcoin as payment for goods and services. Accordingly, after September 7, Bitcoin will not only be legal tender, but forced tender. To make this radical change more palatable, the government promises to put $30 into the digital wallet of each Salvadoran who downloads the government’s cryptocurrency app.

President Bukele’s radical crypto initiative made headlines around the world. It also made him somewhat of a folk hero in the crypto community. But, in El Salvador, Bukele received little more than cynical glances. After all, since El Salvador dumped the colón and replaced it with the U.S. dollar in 2001, its average annual inflation rate has been only 2.03 percent, the lowest rate in Latin America. And if that’s not enough, even though the greenback is legal tender, all currencies are legal to use in El Salvador. So, Salvadorans ask, “Why change our dollarized competitive exchange-rate regime?” It works like a charm. The World Bank and International Monetary Fund have made the same observation and asked the same question. And rightfully so . . .

Big Tech

Sean-Michael Pigeon:

More and more voices are decrying the increasing influence of tech companies in political discourse. Many on the left and the right have called for antitrust legislation to curtail the influence of these large conglomerates. However, the increase in teleworking may open up a new and even more dangerous avenue for Big Tech to exert influence, not over politics but over everyday life itself.

A recent report from NBC News found that Big Tech companies have installed cameras inside worker’s bedrooms to make sure they are working hard enough. The report specifically examines the practices of a Columbia-based call center that services companies such as Apple, Amazon, and Uber. The details of the arrangement are truly terrifying . . .

Private Enterprise

Marc Joffe:

Policymakers and activists often condemn government contracts with for-profit providers, arguing that the quest for profit inherently corrupts private businesses. To the extent that governments must rely on third-party service providers, such critics often see private nonprofit organizations as the morally superior option, believing them to be somehow insulated from financial motivations.

But nonprofit entities are not inherently immune to greed, and just like their for-profit counterparts, they should be held accountable by free-market competition when awarded contracts for the provision of services. As much as possible, a nonprofit should be subject to provisions that tie profit (or “net revenues” in nonprofit parlance) to performance standards set by the government agency that has awarded it a contract . . .

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