Economics & Global Affairs

David Kearn argues that even in the absence of restrictive resource and budgetary constraints, a focus on identifying and achieving concrete objectives that will position the United States and its allies to effectively deter aggression in critical regional flashpoints should be the priority given the stressed nature of the defense industrial base and the nuclear enterprise.

Last week, U.S. Sen. Joe Manchin seemingly dashed Democrats’ hopes for congressional action to slow climate change. Sen. Bernie Sanders accused Manchin of “sabotag[ing] the president’s agenda”; Rep. John Yarmuth, when asked about the consequences of Congress not acting on climate change, said, “We’re all going to die”; and climate activists, as well as some Democrats in Congress, wondered if Manchin should be removed as chair of the Senate Energy and Natural Resources Committee.

For many, integrating “decarbonization” into public policy, corporate and financial strategies has become a requirement, not an option — yet, what happens when the critical link between climate stability and decarbonization breaks?

The US dollar is up 12% against the euro over the last year.  Having moved from 1.21 $/€ in May 2021 to 1.07 $/€ today, the exchange rate seems to be approaching one-to-one parity for the first time.  Europeans are not happy about it. If you think that prices for oil and other commodities are high now in terms of dollars, you should see what they look like in terms of euros.  Get ready for “reverse currency wars.”

With elevated global inflation likely to persist for some time, the prospect of competitive exchange-rate appreciations is looming larger. Instead of a race to the bottom in the currency market, there may be a scramble to the top – and poorer countries will likely suffer the most.

The surprising potency of the multilateral sanctions imposed on Russia has been exceeded only by that of Ukrainians’ resistance to Russia’s invasion of their country. True, it is difficult to imagine that sanctions will bring the Russian economy to its knees faster than Russian troops are able to capture Kyiv or lay waste to the country. But, ultimately, Russia will lose much in this war.

 

When Fed Chairman William McChesney Martin delivered his famous line about central banks, his key point was that it is their job to take away the punch bowl just when the party really gets going, rather than waiting until revelers have turned drunken and raucous. In the aftermath of the 1970s inflation, it became an item of faith that monetary authorities shouldn’t wait until elevated inflation shows its face, before reining in an overheating economy.  They are currently developing a renewed appreciation for the wisdom of this old metaphor.

During the decade that began with the Global Financial Crisis (GFC) in 2008, some central bankers arguably followed this time-honored practice into episodes of unnecessarily tight monetary policy.  In retrospect, they at times over-estimated the dangers of inflation.  [More on this below.]  They were “fighting the last war.”

In 1955, then-US Federal Reserve Chair William McChesney Martin famously said that the Fed’s job was to take away the punch bowl “just when the party was really warming up,” rather than waiting until the revelers were drunk and raucous. Decades later, in the aftermath of the 1970s inflation, it became an article of faith among monetary policymakers that they should not wait until elevated inflation showed its face before reining in an overheating economy. Today, with inflation surging, they are developing a renewed appreciation for the punch-bowl metaphor.

Are the US and other advanced countries experiencing stagflation?  Stagflation is the unfortunate combination of high inflation with low growth in output and employment that characterized the mid-1970s.  Are we back in that decade?

El Salvador this month became the first country to adopt a cryptocurrency, Bitcoin, as legal tender.  One says “the first” as if there will be others.  But the idea is highly dubious.

I will admit, like many economists, that I fail to see what problem cryptocurrencies solve. They aren’t well designed to fulfill any of the classic functions of money — unit of account, store of value, or means of payment – in part because they are so extraordinarily volatile in price.  This volatility is not surprising, since they are backed neither by reserves nor by the reputation of a well-established institution, such as a government or even a private bank or other trusted corporation.