Sanctions

About 5 days ago, on February 24, Russia illegally and without provocation and cause attacked the sovereign country of Ukraine. It is in everyone’s interest (with the exception of the military industrial complex) to end the fighting and establish a sustainable peace as quickly as possible. I explored options in my blog Saturday.  “Ukraine-Russia-NATO”  

Sanctions are being piled on as the main counter weapon of choice around the globe, along with supplying Ukraine with military equipment. But which sanctions of what activities (use of SWIFT, banning access of Russian airlines, banning any travel across Russian borders, banning trade in military products, banning all trade, etc.) should be imposed? If all or almost all countries joined together to shut down all trade, travel, and financial flows between Russia and the rest of the world until Russia ends this war and fully withdraws it troops, the impact on Russia (and hopefully to a lesser extent the rest of the world) would be devastating. While it is hard to predict whether the Russian people would primarily blame the U.S. and the West or Putin’s government for the hardships imposed—it is unlikely that Russia would withstand such isolation for long. Russia seems well on its way to such isolation.

While sanctions have historically not been a very effective tool for changing a country’s behavior, such total isolation, if it can be achieved, would almost certainly be more effective than the more limited sanctions normally imposed. “A new history of sanctions has unsettling lessons for today”  Putin will have to back down or escalate. Putin would indeed be boxed into a very difficult position and there is no knowing how he might react. It is hard to imagine Russian military escalation beyond Ukraine’s borders, but it is possible, especially in the ambiguous ways often favored by Moscow (e.g., cyber-attacks). If Putin is squeezed too hard, the risk of nuclear war could no longer be ignored. This is a dangerous period.  “Just short of nuclear–the latest financial sanctions will cripple Russia’s economy” Such comprehensive sanctions should be largely removed as soon as Russian troops are withdrawn from Ukraine territory.

But while it is foolish (i.e., contrary to American interests) to keep Russia as an enemy in the long run, and it was foolish to have made it one in the first place, the Kremlin should pay a price for its attack on Ukraine.

Sanctions impose a cost on their target but also on those imposing the sanctions. If, for example, Russia is denied access to western products, the sellers are also denied the sales. Moreover, for many if not most economic sanctions, the people of the sanctioned country tend to suffer more than the government that is the real target. For post conflict sanctions, thought should be given to the most effective ways to sanction Putin and his friends specifically with minimal damage to the Russian economy. The borders and trade should be reopened to all but a small list of Kremlin officials including Putin. Putin’s properties and other assets abroad should be frozen or confiscated to contribute to Russian reparations for damage now being inflicted on Ukraine. “Russia’s military attack on Ukraine will have consequences for Putin”

Yesterday (2/27.22 6:37 PM), Edward Luttwak tweeted: “Putin’s agreement to talks with Zelensky’s reps is an abject surrender: by now the Russians should have been in control in Kiev and across the Ukraine with Zelensky dead or exiled. Frantic to divert attention, Putin has placed Russia’s nuclear forces on high alert. Meaning: zero”

Let’s hope that he is correct.

Every action should be carefully measured against is costs and benefits both short term and long term. Another protracted cold war would be a costly mistake for everyone. All measures should ultimately contribute to peaceful and secure relations between all countries.  Greenwald–War propaganda about Ukraine

Ukraine–Russia–NATO

Russia has surprised most of us with an all-out attack on Ukraine. What should the U.S., NATO, and Ukraine do now? Each possible answer implies different possible consequences. We would be wise to understand them as well as possible. We should try to evaluate the probable long-term effects as well as the immediate ones.

The fact of the matter is that that we made serious errors since the disbanding of the Soviet Union (the expansion of NATO, establishing Aegis Ashore missiles in Romania and Poland, etc.) that began on Christmas 1991. The effect was that Russia walked away from NATO rather than becoming a member. While all of this is very regrettable, it is nonetheless history. We are where we are now because this history has inevitably influenced the present and thereafter the future of Russian relations with the rest of the world.

While Ukrainian resistance appears stronger than Putin expected, Russia may well take control of parts of Kyiv and other western Ukrainian cities within days or weeks. However, following earlier examples of Russian incursions and given the inadequate size of its forces, it is likely to quickly withdraw after flexing its now stronger muscles in negotiating an agreement with the U.S., NATO and Ukraine.

According to Edward Luttwak tweeting on the afternoon of Feb 24 “Air strikes can reach any target but Russian troops are much too few to achieve a coup de main, the single act that both starts and ends a war. Yes, they control airfields & some city centers. Beyond them individual soldiers & volunteers will start killing Russian soldiers w/o end. They had a missile strike plan viz Ukraine air force, very weak in any case. Russian troops too few to control the country beyond airfields, central Kiev, Odessa, etc., nothing for hostile W Ukraine. Ukrainian soldiers & volunteers will fire & kill Russians. Final result: the end of Putin.”

President Biden has wisely stated that the U.S. will not send troops into Ukraine, which is not a NATO member. While he has rightly condemned Russia’s illegal attack, and together with our European allies has significantly increased economic sanctions on Russian banks, businesses, and officials, though still with significant carveouts, he has correctly, in my judgement, concluded that the cost to our already overstretched budget to fight a war over Ukraine is not in America’s interests.  We care about many people and things in the world for which it is not justified to spend our financial and human resources rather than focusing them initially on our own domestic needs. Some among us may want to rule the world but we can’t afford it either financially or morally. Our military industrial complex, which profits from wars, probably disagrees.

Luttwak claims that “close[ing] the road and rail connections between Germany and Russia… would be the most powerful of all sanctions.” This could be done unilaterally by Poland or the Polish people. “Polish peace demonstrators [could] stop the unceasing traffic of trucks delivering Western European exports to Russia.  German cars, Dutch vegetables, French luxury exports.  That very powerful sanction does not require NATO or EU approval, just some people who care. ‘No bypass’”

More generally, sanctions have historically not been a very effective tool. “A new history of sanctions has unsettling lessons for today” Trade is win win. Both sides benefit. Thus, blocking trade is loss loss. Both sides suffer. Moreover, it is very difficult to design sanctions that hurt the target government more than its people. “Econ 101-How to help Afghans”

Ukraine is more important and relevant to European security than to ours (though one may argue that if Ukraine falls and the democracy in Europe suffers and crumbles, this affects the United States in the long run as well). In addition to financial and military aid to Ukraine, one or more European countries could, outside of the NATO context, send their troops to help defend the existing government of Ukraine.

It is very unlikely that Putin would escalate the fighting further, though it is not clear how rational Putin is these days and Russia has nuclear weapons. He was close to crazy to have launched the war now underway in Ukraine. Such European military intervention would likely save the Zelensky government and the negotiated peace (which should have been negotiated a month or two ago on the basis of Putin’s eight demands last December) would still need to mutually satisfy the interests of Russia, Europe and Ukraine.

If Ukraine receives no military help, it might still hold off the Russian army from toppling the Zelensky government. Russia might then be forced to be satisfied to hold the eastern, Russian dominated piece of the pie. The final settlement might take a bit longer in this case, but it might contain similar provisions. As Luttwak has argued above, a full Russian victory is unlikely and is expected not to last for long and would be a huge drain on Russian resources. Russia will surely pay a very high price for (presumably) gaining a government subservient to Moscow.

The longer run (five to ten or more years) consequence of one or another of the above scenarios is, of course, hard to predict but it should be taken into account. If the Zelensky government survives largely on the basis of its own efforts, it might be hoped that Zelensky’s far from complete efforts to clean up and reform his government will continue and be strengthened. A Russian victory (replacing Zelensky–dead or alive–with a Moscow puppet) would surely perpetuate and strengthen the corruption Ukraine has suffered for decades. Putin’s original eight demands would still have to be resolved and agreed in a mutually acceptable way. Doing so in January, of course, would have saved everyone a lot of lives and treasure, but discussions of these issues were hard to find in the American press.  

How this war is settled will also have consequences for American, EU, and Russian assessments of each other’s strengths and interests and thus how to deal with one another in the future. Will Russia revert to an enemy in which we keep our defense industry happy with another cold war or will we undo the NATO inflicted damage of the last twenty years that turned a potential friend to a costly enemy? China has decided to stay out of the fray neither supporting the US-Europe alliance nor the Russians which is a wise decision on their part.

The initial reactions in Russia have not favored Putin. The Russian population was not prepared to shift from seeing Ukraine as part of the family to an enemy that its sons and daughters were dying to overturn. A Russian defeat or even stalemate “victory” could be the end of Putin.  I am predisposed to believe in happy endings, which is perhaps why no one pays me for my forecasts.

We must never lose sight of the fact that Russia is more than Putin, Ukraine is more than Zelensky, and NATO is more than Secretary General Jens Stoltenberg. If I had said Biden (or Trump) you would have understood instantly. And among the population are many factions. The U.S. seems rarely to take such domestic realities into account when it decides to march into and take over countries.

In an email February 26, Chas Freeman said: “Regrettably, the place of Ukraine in Europe, which might have been decided through negotiations between Moscow and Washington in consultation with Kyiv, will now be decided through interactions by Russian dictation to Ukrainians without reference to either the United States or NATO.  Russia’s coercive diplomacy failed to elicit an offer to address its longstanding, oft-expressed concerns about the possibility that Ukraine might become part of an American sphere of influence on its border under circumstances in which the United States has officially designated Russia as an adversary.  So, Moscow made good on its ultimatum, and used force.  As it did so, it moved the goalposts.  Now Russia appears to seek the subordination of Ukraine to its domination rather than simply its denial to the United States. This is a tragedy that might have been avoided.  Now we are left to hope for a resurrection of diplomacy when there is no clear path to it.”

On February 25, Pavel K Baev stated that: “Now we know that Putin’s obsession with Ukraine — which constitutes a threat to his regime not because of hypothetic NATO missiles, but because of its choice for democracy and closer ties with Europe — prevailed over common political sense and strategic risk assessments.” “Implications of Russia’s invasion of Ukraine–Brookings Brief”

But the almost last word should go to Edward Luttwak who tweeted on Feb 26: “Having invaded with too few troops to pull off a fait accompli, with many Russian troops killed because of incautious tactics that presumed no real resistance, Putin has also closed the door to talks with Pres Zelensky: ‘I will not talk with drug addicts and neo-Nazis’. Sanctions.   Not too late to send large numbers of small arms and point & shoot anti-tank weapons to Ukraine via Poland or Slovakia. There are warehouses full of both (+ their ammo) across NATO because of the drastic reduction in force-levels. Ukrainians are resisting bravely and deserve help”

And the final word goes to Thomas Pickering (former US Ambassador to the Russian Federation and other places): “The end result must be respectful, fair, and balanced for the people of Russia and for all other parties. It will take wisdom, time, sacrifice, and persistence. To get there, the U.S. must lead, help to finance, and participate extensively in an international coalition — through the United Nations if possible, outside it if necessary — and listen to all like-minded states.” “Implications of Russia’s invasion of Ukraine–Brookings Brief”

Diplomacy

What does the press coverage of the Canadian trucker strike and Russia’s threatened attack on Ukraine have in common?  Matt Taibbi’s column on the “The Great International Convoy Fiasco” will tell you. For good measure, he added that “On February 4th, 2004, the Wall Street Journal published, ‘A Historian’s Take on Islam Steers U.S. in Terrorism Fight’, about the influence of a Princeton Scholar named Bernard Lewis on George W. Bush’s Iraq policy. The ‘Lewis Doctrine’ was simple. The good professor believed there was no point to asking, Why do they hate us?”

For many weeks the American press (I apologize for lumping our somewhat diverse collection of newspapers into one camp) have been shouting that Russia might invade Ukraine any day now. Volodymyr Zelensky, the President of Ukraine, says that that is nonsense and to please stop saying it. I am inclined to believe him over our newspapers.

Something similar is going on with the striking Canadian truck drivers. The message in both cases is that we need to be tough. Arrest them and remove their trucks that are blocking the border with the U.S. Beef up our troops in Europe and tell Putin all the nasty things we will do to him if Russian troops cross the border. The mindset that reacts in these ways is not in our national interest.

Why are the truckers striking and why is Putin demanding a rethink of European defense architecture? While Putin has told us explicitly what he wants, to my knowledge no meetings have occurred between the Canadian truckers and the Canadian government. We may or may not sympathize with some of the Trucker’s concerns, but the proper (dare I say adult) starting point is to sit down with them and understand what they want.  At least the Biden administration is talking with the Russians, but it would be healthier if more were said in the Press about these talks and the issues that Russia has raised, and less about the potential for, if not eminence of, war. Such discussion of the pros and cons of mutually acceptable options are out there, but you need to search for them.

The role of diplomacy (the first intergovernmental tool of civilized nations) is to understand the concerns and desires of the other side. That is the essential first step in seeking out areas of common ground that each side can live with. War is (or should be) a last resort.  I am sure that Lockheed Martin, Raytheon Technologies, General Dynamics, Northrop Grumman, etc. can figure out other uses for their manufacturing and technical capabilities. “National Defense”

Econ 101:  How to help Afghans?

The world is rightly looking for ways to help Afghans without helping the Taliban (until or unless the Taliban forms a government the world is willing to recognize). Washington Post: “How to help Afghans without aiding Taliban”  In this Post article Anthony Faiola states that “The biggest problem isn’t a lack of food. Rather, it’s the disappearance of what had been the lifeblood of the Afghan economy — Western cash.” This mischaracterizes the problems of Afghans thus confusing our understanding. In this note I attempt to clarify the “cash” aspect of Afghanistan’s problems.

But first there is no escaping the fact that the cut back of foreign aid is reducing the income (and the goods that income buys) available to Afghans. Mention is often made of the approximately 10 billion US dollars of the Afghan government’s funds frozen in deposits abroad. These funds cannot be used until a new Afghan government is recognized with the authority to claim them. But these funds are not part of the lost revenue to the Afghan government. They are the wealth–the previous income saved–of the government (whoever that will turn out to be). The savings that we accumulate from our incomes for retirement or whatever is our wealth not our current income (though it can be drawn on to augment current income).

In recent years (prior to the Taliban take over) the Afghan government’s operating expenditures were 16 to 18% of Afghanistan’s GDP while its domestic revenue was 12 to 14% of GDP. The balance of its financing plus all development expenditures were from donors. The hope is that squeezing the Taliban “government” financially will add to the incentives for them to quickly form an inclusive government meeting international norms of human rights. Unfortunately, it is not possible to shut off the flow of funds to the government without also starving the Afghan people.

While the Ghani government has been replaced (temporarily) by Taliban leaders, the institutions (ministries and agencies) of government remain, but with new management. Of the government’s operating expenditures roughly 80% was for wages and salaries. Thus, the government could more or less finance its wage and salary expenses from its own domestic revenue without donor support. Indeed, all salaries have been and continue to be paid in the central bank (Da Afghanistan Bank — DAB) and presumably in the other government ministries as well, albeit with delays. However, the real value of these incomes is being reduced because of increased inflation (an indirect form of taxation). DAB and other government agencies have largely stopped providing economic and financial data since the Taliban take over.  IMF First-Review-Under-the-Under-the-Extended-Credit-Facility

None the less, freezing Afghanistan’s deposits abroad (DAB’s foreign exchange reserves held abroad) has created monetary problems within Afghanistan because of the inability to import the cash (dollar banknotes) on which the economy depends. Afghanistan remains a largely cash economy. Most payments are made in cash. Though inflation has been low in recent years (generally 2-4%), inflation in earlier decades was relatively high and thus Afghans held and transacted in US dollars quite extensively. Around 70% of bank deposits are in dollars. The availability of USD banknotes for local payments is thus very important. These were mostly supplied by the New York Federal Reserve Bank from the dollar deposits that DAB maintains there (and now frozen).

Prior to the Taliban takeover, the normal operation of DAB’s monetary policy consisted of receiving US dollars from the government (largely from donor grants) and depositing the equivalent value of Afghani in the government’s accounts. The government disbursed these Afghani to its employees in wage and salary payments (generally by electronic deposits to employee bank accounts). Without offset, the resulting creation and injection of these Afghani would be inflationary. DAB drains (buys back) this excess base money by auctioning some of the dollars it received from the government (sufficient to stabilize the dollar exchange rate) and capital notes of DAB. The government’s deposits of dollars with DAB took the form of credits to DAB’s dollar account with the New York Fed. From these deposits DAB pays the Federal Reserve to fly USD banknotes to Kabul as needed for DAB’s dollar auctions.

In mid-April 2021, when the U.S. announced its intention to withdraw the rest of its military personnel by September, an increased outflow of dollars by Afghans wanting to protect their wealth put the Afghani exchange rate under pressure. Acting DAB Governor Ajmal Ahmady (his appointment was never approved by Parliament) increased dollar auctions to stabilize the exchange rate. “Afghan central bank drained dollar stockpile before Kabul fell” As the amount of dollars in its vaults ran down, it used USD banknotes that it held on behalf of banks (approximately $700 million USD). The delivery of additional cash from New York expected in July never arrived and DAB’s balances at the New York Fed are now frozen until a new government is recognized so that no more dollar cash can be purchased from the Federal Reserve by DAB.

As an aside, I was surprised during a 2009 visit to Zimbabwe—as part of an IMF team following Zimbabwe’s dramatic hyperinflation during which it dollarized—to learn that there was an active private market in dollar banknotes supplying Zimbabwe from South Africa:  “Hyperinflation in Zimbabwe”

In the days just before and after the American evacuation in August 2021 public demands to withdraw dollar cash intensified but DAB had largely used up the dollars in its vaults (both its own and those held for banks). In response, on August 14 DAB imposed limits on the amounts that could be withdrawn each day. This fed public concern that their banks were running out of dollar banknotes and triggered runs on the banks. DAB was even running low on Afghani banknotes, which might have replaced dollars. Without access to its deposits abroad DAB is unable to purchase additional dollar cash nor pay for printing additional Afghani. For a largely cash and heavily dollarized economy this drying up of cash liquidity is very disruptive and the basis of the statement that people can’t buy the food that might be available.

In addition to the cash shortage, Afghans are also lining up to withdraw their deposits out of concern for a possible bank failure. Aid cut offs and civil strife have damaged many firms resulting in arrears on their bank loan payments. This threatens to push bank illiquidity into insolvency. Even if DAB had USD and AFN cash to lend or sell to banks with fully performing loans, DAB is currently unable to buy or lend against these illiquid bank assets. Moreover, the Office of Foreign Assets Control (OFAC) of the U.S. Treasury has sanctioned payments to many Afghan entities and activities blocking many payments to and from abroad by Afghan banks and uncertainly about the application of the sanctions regime has made banks overly cautious about executing payments for their customers.

UN and other aid organizations have experience in other countries with delivering wages and other payments to targeted recipiences (teachers, healthcare workers and potentially even government employees) without the funds passing through the government’s hands. This approach is needed and is being developed for use in Afghanistan. OFAC sanctions are being modestly relaxed and UN and other aid agencies have begun funding the importation of dollar cash for humanitarian assistance projects. The use of digital mobile phone payments, such as M-Paisa and HesabPay, should be promoted and exploitation to the extent possible.  “Use of mobile phone payments” The United States needs to and has been gradually relaxing its payment restrictions to make this possible.

The Taliban leadership needs to take urgent steps to establish a new inclusive government that can and will be recognized internationally thus unfreezing Afghanistan’s (and DAB’s) deposits abroad and eliminating its cash shortage and restoring development assistance. In the meantime, in addition to the urgent need for humanitarian assistance that bypasses the Taliban, the New York Federal Reserve, or any other doners, should consider a loan to DAB to finance immediate shipments of dollar banknotes to Kabul. Da Afghanistan Bank Law adequately protects the central bank from government interference in its conduct of monetary policy and bank supervision. As a condition for restoring USD currency shipments to DAB, the Federal Reserve (and the UN) should obtain an agreement from the Taliban government to fully respect that law and appoint qualified people to its Supreme Council and Executive Board.

Until Afghanistan has a proper government, and its economic development can resume, Afghans, many of whom are very poor to begin with, will suffer unnecessarily depressed incomes. The lack of cash is adding a further, tragic, and quite unnecessary disruption to the lives of a long-suffering people. This can be and should be fixed urgently. Any such assistance will somewhat reduce the financial pressure on the Taliban, but a total financial squeeze on the government will fall on the people of Afghanistan as well.

________________________________________ 

I worked in Afghanistan as a member of the IMF program and technical assistant teams from January 2002 until mid 2015. I am grateful to Syed Ishaq Alavi for his insights and comments on this article. Mr. Alavi was Advisor to the governor of DAB from 2010 to early 2013, Director General Monetary Policy Department of DAB from early 2013 to mid 2018, and advisor to the Executive Director of the International Monetary Fund for Afghanistan, Algeria, Ghana, Iran, Libya, Morocco, Pakistan, and Tunisia from June 2018 to August 2020. For the sake of their security, I am not naming those who helped me with this article who remain in Afghanistan.

What to make of 2022?

Some ostensibly smart people believe some, well, unbelievable things.  Those who believe, I mean they apparently really do believe, that there are funny and dangerous things in the Covid vaccines are doing all of us harm. But the damage to the rest of us of such beliefs will be limited. Those tens of thousands of people who will die unnecessarily as a result of the unvaccinated, will largely, but not exclusively, be those refusing to get vaccinated.

But what about the 70% of Republican voters who still believe that Trump actually won the election despite the Trump team’s complete failure to present any credible evidence in any court, and even after the “Republican-dominated Arizona Senate hired Cyber Ninjas, a Florida cybersecurity firm with no prior election auditing experience, to review the 2020 election results in Maricopa County, where Phoenix is located,” which found that Biden actually won several votes more than the official count. “Fact-check Arizona audit affirms Biden’s win” Do such believers, in the face of the contrary evidence, constitute a danger to America?

“This isn’t some shrug-your-shoulders-and-roll-your-eyes partisan circus. How Americans understand Trump’s months-long, falsehood-fueled campaign to overturn the 2020 election, ultimately calling on supporters to march on the Capitol a year ago, remains a clear and present force shaping U.S. politics.” “Biden-Trump face off this week-jan-6”  Thousands of Trump supporters stormed the U.S. Capital on January 6 in an effort to get Congress to overturn Biden’s election in favor of Trump. “Federal prosecutors in the District have charged more than 725 individuals with various crimes in connection with the deadly Jan. 6 insurrection….” “Capitol deadly attack-insurrection-arrested-convicted”

While the investigation into this event is ongoing, public trust in the integrity of our elections has fallen. Laws in many states have been changed to take the oversight of state elections from public officials and give it to political bodies (state legislatures). What might happen in 2024 if Trump runs again and is again defeated? Or wins? Will the public accept the result or challenge it, and what form might that challenge take?

I was shocked to read that 1 in 3 Americans say that violence against the government might be justified.  “1-3 Americans say violence against government can be justified”  Congress is sharply divided and unable to pass legislation reflecting traditional bipartisan compromises. Senator Ted Cruz has stalled the Senate’s consent to a large number of President Biden’s state department appointments at a time when the strengthening of our diplomacy is badly needed in the national interest. “Senate confirmations stalled by Cruz” The winning party is (or these days we must say “should be”) allowed to appoint its own government. How will the public react to all of this? Is increased violence in prospect? Is civil war in the 21st century America possible?

It is time for the Republican leadership, who have cowardly fallen silent to Trump’s steady stream of lies, to speak up for the traditional values of the Republican Party. It’s time for all of us of all political parties to present and debate our views civilly with a reasoned presentation of the pros and cons of what we believe. We must stop labeling our opponents as enemies. We must find common ground where possible and live graciously with policies supported by the majority. We will and should continue to promote what we each think best for our country but within the commitment that we are all one big family.  The radicals of the right and left will still be there but hopefully on the fringes of a broad moderate middle. There is no silencing the Marjorie Taylor Greene’s of the world, but few take her wacky conspiracy theories seriously. If more of us were willing to say so, few would pay attention to such nut cakes.

Our diversity has been a strength and will be again when we recover our manners and treat one another respectfully and courteously even when we hold different views. The large sphere left to us each individually to do and live as we choose enables and supports that diversity. But we must change our tone and speak up in defense of our neighbors’ rights to their views. And we must ignore, if not condemn, the hopefully limited number of truly bad apples among us.

Econ 101: Erdogan’s Turkey

President Erdogan believes that by cutting interest rates on the Turkish lira the resulting depreciation of its exchange rate will cheapen Turkish goods and thus increase their exports and promote growth (the China model, he thinks). Accordingly, he has replaced four central bank governors who could not bring themselves to accede to his demands. “Revolving door-Turkeys-last-four-central-bank-chiefs”

In an earlier disastrous cycle, the Central Bank of Turkey (CBT) reduced its policy rate from 24% in 2019 in steps to 8.5% in mid 2020 only to raise it again to 19% in March 2021 until the latest cuts started in September of this years. In November, “The Monetary Policy Committee (MPC) has decided to reduce the policy rate (one-week repo auction rate) from 15 percent to 14 percent.” “Press Releases/2021/ANO2021-59”  

When I was part of the IMF team in 2000-1 working with the Turkish authorities to regain control of inflation (which ranged from 60 and 100 percent between 1980 and 1999) and clean up the banking sector (they closed 13 banks in 2000), the CBT policy interest rate was briefly raised to 100% (ala Paul Volcker in the US). Inflation declined rapidly to single digit levels (until the last four years) with interest rates quickly following.

The dollar price of the Turkish lira has fallen in half since February of this year (i.e., a dollar will buy twice as many lira–one lira cost 0.14 dollars in February and 0.061 dollar on December 17).  Erdogan seems to think he is choosing to benefit workers (exporters) over consumers (importer), though they are generally the same people.  If the lira depreciates, the rest of the world can buy lira more cheaply and thus (according to Erdogan) will buy more cheaper Turkish exports. This should increase the demand for Turkish good and the jobs that produce them and increase the growth of the Turkish economy.

As any economist can explain to Mr. Erdogan, depreciating the exchange rate with lower interest rates in Turkey than in the rest of the world is achieved by printing more money with which to buy foreign currencies. Broad money (M2) increased almost 48% in November 2020 from a year earlier and 24% from a year earlier this November. But such a rapid increase in the money supply will increase prices in Turkey over and above the increase in the price of imports from the lira’s depreciation. “Turkey-central bank-Erdogan”

Inflation in Turkey has risen from single digits between 2004 to 2016 to “21.3%” in November 2021 (annual rate from a year earlier). According to the Central Banking Journal “Official figures show Turkish inflation reached 21.31% year-on-year in November, but there is considerable controversy over whether these figures are accurate. Several well-informed observers, have told Central Banking that they believe the official figures understate actual inflation.”  “Turkey’s currency hits new low after further rate cut”  Steve Hanke reports the actual rate at around 100%  “Steve Hanke’s estimate of Turkey’s inflation rate”

In short, Mr. Erdogan’s crazy policy of reducing interest rates has not made Turkish goods cheaper for the rest of the world. As the lira became cheaper for foreigners (depreciation), the lira price of those goods became more expensive (inflation). The real effective exchange rate (which takes account of both) is not being significantly reduced because Turkey is experiencing higher and higher inflation along with the lira’s depreciation. Monetary policy works in Turkey the same way as in every other place.  The CBT’s inflation target, by the way, is 5%. “Turkey-Erdogan currency crisis”

Where Does Senator Josh Hawley Stand?

Upon what basis should we make our decisions to do or not do something? Upon what basis should the government take the right to make decisions for us? The quality of our individual choices depends on the values and principles that guild us. These profoundly influence the quality of our lives in our given or chosen societies.  I have discussed this issue before:  “The great divide-who decides” 

The issue of Covid-19 vaccination mandates and related issues are currently providing vivid and noisy examples of these questions. A few of my reactionary libertarian friends (in contrast with more thoughtful libertarians) insist that it is their right to decide whether to get vaccinated or not. Perhaps, but it is not their right to knowingly infect others (the freedom to swing my fist ends at your face). Specifically, the unvaccinated do not have the right to be where they are not wanted or permitted by private establishments. Businesses (restaurants, theaters, sports events, etc.) should have the right to determine who they serve (subject to the sometimes problematic limitations imposed by the 1964 Civil Rights Act Virtually all such businesses wisely go out of their way to reassure potential customers that they are save places to visit. This generally takes the form of mandating that their employees and customers are vaccinated for Covid. In my opinion the government, in addition to collecting and disseminating the best possible information on Covid risks and how to minimize them, should protect the freedom of businesses to make Covid policies they consider appropriate to their own business and should mandate that all of the government’s own employees be vaccinated. Only specific health issues should qualify for potential exemption. Religious and other beliefs should not.

Sports, and the Beijing Winter Olympics in particular, also raise the issue of who decides to participate in the face of serious Chinese human rights violations. I generally think that sporting competitions should not be influenced by politics. So, should athletes participate in the upcoming winter Olympics and who should decide?

In his December 9 column in the Washington Post Josh Rogin makes a strong case for each of us to speak out against violations of our principles: “Enes Kanter Freedom takes bold stance on China” “’We must always take sides,’ Holocaust survivor Elie Wiesel said while accepting the Nobel Peace Prize in 1986. ‘Neutrality helps the oppressor, never the victim. Silence encourages the tormentor, never the tormented. Sometimes we must interfere.’”

President Biden recently declared a diplomatic boycott of the China games, meaning that the U.S. government will have no representatives there, though the American Olympic teams and individual athletes are free to make their own decisions. The Economist reported that “France will not join the partial boycott that America, Australia, Britain and Canada are calling against the Beijing Winter Olympics in protest at China’s treatment of its Uyghur minority and of Peng Shuai, a tennis star. President Emmanuel Macron complained that the Anglophone countries’ merely withholding diplomatic representation—while their athletes compete—is not an effective way to alter China’s objectionable policies.” “The Economist Morning Brief”

“Sen. Josh Hawley, R-Mo., [also] ridiculed the Biden move, echoing Hagerty’s claim that the diplomatic boycott did not go far enough.  ‘A diplomatic boycott of the Beijing Olympics is a joke,’ Hawley told the Daily Caller Monday. ‘China doesn’t care if Biden and his team show up. They want our athletes.’”  In short, Hawley wants a presidential mandate forbidding participation of American athletes in the Beijing Winter games. “Republicans blast Biden apos diplomatic”

On the other hand, Sen. Hawley opposes President Biden’s proposed mandate that every eligible person must receive an approved Covid-19 vaccination.  “Senator Hawley-Biden vaccine mandate shows contempt for religious liberty”  In this area the good Senator puts “choice” over “life.”  With regard to abortion Senator Hawley sides with “life” over “choice.”

“U.S. Senator Josh Hawley (R-Mo.) issued a statement in support of Missourians who traveled to Washington, D.C., today to participate in the 46th Annual March for Life. The group of nearly 3,000 Missourians represented all ages, from high schoolers to retirees and came from all over the state including Cape Girardeau, Jefferson City, Kansas City, Sedalia and St. Louis.

“’It’s incredible to see people of all ages and backgrounds, from Missouri and across the country, who have made the trek to our nation’s capital to speak their hearts, their minds, their faith – to tell their elected leaders that this nation was founded on the dignity of every person and that every life is worth fighting for,’ said Senator Hawley. ‘I am proud to stand for the right to life. Always.’”

“Senator Hawley commends missourians participating in march for life”

Where is Senator Hawley coming from and where is he going?  Regarding health and vaccination against Covid-19, Hawley is “pro choice” rather than “pro life.” Regarding the abortion of non-viable fetuses, Hawley is pro (potential) life rather than pro choice.  What are the principles guiding when he is one and when he is the other (beyond political expediency)? When should government mandate our choices and when not?

Which is it for gas prices?

“President Biden on Wednesday called on the Federal Trade Commission to launch an investigation into oil and gas companies, alleging that their “anti-consumer” behavior has led to higher gas prices…. ‘The bottom line is this: gasoline prices at the pump remain high, even though oil and gas companies’ costs are declining,’ Biden wrote in a letter to FTC Chair Lina Khan.” “Biden-FTC-gas-prices–Washington Post”

On the other hand, the Whitehouse website states:

“The United States has set a goal to reach 100 percent carbon pollution-free electricity by 2035,… America’s 2030 target picks up the pace of emissions reductions in the United States, compared to historical levels, while supporting President Biden’s existing goals to create a carbon pollution-free power sector by 2035 and net zero emissions economy by no later than 2050.”  Whitehouse fact sheet: President Biden sets 2030 greenhouse gas pollution reduction target

Which is it?  Does Biden intend to replace oil and gasoline (and coal) with carbon free energy, which would increase oil and gas prices (ultimately to infinity), or does he want to keep oil and gas prices low?

A market approach to phasing out petroleum products would be to increase their cost via a carbon tax–an approach that I support.

American policy on Taiwan

Following President Richard Nixon’s famous visit to China in 1979 the so called One-China policy was first stated in the Shanghai Communiqué of 1972: “the United States acknowledges that Chinese on either side of the Taiwan Strait maintain there is but one China and that Taiwan is a part of China. The United States does not challenge that position.” “One China policy – U.S. policy”  However, in the Taiwan Relations Act (April 10, 1979), the U.S. stressed its opposition to any effort by the People’s Republic of China (PRC) to change conditions in Taiwan by force. Just how that opposition might be expressed has remained ambiguous ever since.

The United States has no treaty obligation to help defend the Republic of China (ROC–Taiwan) against a military attack by the PRC. It is doubtful that the U.S., located thousands of miles from Taiwan, could win an encounter with the PRC only 100 miles away. In recent simulated war games with China the U.S. has lost. “As the US and China continue to posture the key will be Taiwan” A military intervention by the U.S. would create a significant risk of escalation into nuclear war. 

China experts such as Chas Freeman have argued that since Washington long ago agreed that ‘there is only one China and that Taiwan is part of it,’ any mainland invasion would simply be a civil war in which America has no right to intervene.” Moreover, risking nuclear war to defend Taiwan would not be in America’s or anyone else’s interest.

Until quite recently, Taiwan’s efforts to build its capacity to defend itself from a mainland attack rested heavily on the presumption that its defense would come from the U.S. “Taiwan’s military has closely mirrored its U.S. counterpart in miniature for years…. The problem with copying the American approach to warfare is that the U.S. military’s doctrine is to project power over great distances and to maximize mobility and networks to take the fight to the enemy with overwhelming superiority. Taiwan, on the other hand, needs the opposite: short-range and defensive systems that can survive an initial bombardment from a larger adversary and that are suitable for deployment close to home in defense of the island should it come under blockade or attack.” “Winning the fight Taiwan cannot afford to lose”

Taiwan’s almost $17 billion-dollar annual defense expenditures keep American weapon’s companies happy but didn’t contribute seriously to Taiwan’s defense. “Taiwanese military analysts have criticized the island for spending too little on defense, and for spending money on eye-catching purchases such as F-16 fighter jets rather than less-flashy weapons systems that would better enable Taiwan to wage asymmetric warfare against the PLA’s superior strength.” “Concerns about Taiwan put focus on islands defensive weakness” This has begun to change in the last few years toward weapons more appropriate to defending Taiwan against a ground assault.

While it is in America’s interest for Taiwan, as well as every other country in the world, to be peaceful, democratic, and prosperous, that interest is not sufficient to risk going to war–not even close. We should hope that the relations between Taiwan and the Peoples Republic of China remain peaceful and consensual whatever form they ultimately take. But should China attempt to “change conditions in Taiwan by force,” how should the U.S. express its opposition.  It is a very sad commentary on the state of American international policy that so many American policy makers routinely conceive of expressing American opposition militarily. We have done so too often to the detriment of American interests.

On the other hand, a Chinese military attack on Taiwan would be a violation of its commitment not “to change conditions in Taiwan by force.” In such an event the U.S. should oppose such actions vigorously with coordinated diplomatic measures. A U.S. China war would certainly stop all trade with China. This would badly hurt both of us. But even without war, if a total trade embargo by the U.S. were joined by the EU, Australia, Japan, Korea, Canada, UK, and most other UN members it would be devastating to China. China could be expelled from all the international organizations it has so proudly joined in recent years. Its global ambitions would be destroyed. Such prospects would surely be as powerful a deterrent to China’s invasion of Taiwan as would the prospect of U.S. military intervention in defense of Taiwan.

American interests are better served by being the best that we can be, i.e., by strengthening our own economy and political system (which is in a dangerous mess at the moment). It would also be helpful if Ted Cruz would stop blocking President Biden’s State Department appointments so that we can strengthening our use of diplomacy and return our military from its foreign adventures to the defense of our homeland.

See Jon Schwarz’s interesting review:  WE’VE ALL PRETENDED ABOUT TAIWAN FOR 72 YEARS. IT MAY NOT WORK ANY LONGER   “Taiwan, China, nuclear weapons”

Broadband for All

The just passed Infrastructure Investment and Jobs Act provides $65 billion for high-speed internet to make sure that every household can access reliable broadband service. This raises, or should have raised, the question of the most cost-effective way of providing it. Many rural areas enjoy high speed internet access from satellites. These can easily be expanded to cover the entire country and are significantly cheaper than running cables to remote areas. But the other approach is for families wanting such high-speed internet access to live in areas that provided, e.g., cities.

When I taught at the University of Virginia, I choose to live ten miles out of Charlottesville on Piney Mountain. I did have electricity but no water or sewage disposal for which I had to drill a water well and dig a septic tank and system. That was an understood part of the deal of living in a semi remote area and a factor in its cost. Should everyone who chooses to live in remote areas be entitled to electricity, water, sewage, broadband, or whatever other modern convenience comes along or should those wanting such convenances have to live where they are efficiently provided?