The Lowdown Hub

Markets climb a wall of worry – but it’s not Afghanistan that bothers them most.

A slowdown is not the biggest threat to the US economy – the real danger is running too hot for too long, forcing the Fed's hand.




Be it US humiliation in Afghanistan, a surge in delta variant Covid infections, worries about Federal Reserve tightening, and a marked slowdown in China, there is quite a cocktail of negatives building up in the global economy right now and markets are beginning to take note.

Does this presage a wider selloff going into the Autumn, or is it just a late summer squall, signifying nothing very much? On the first of these negatives, I’m not yet convinced that the Afghan debacle is as much of a disaster for the West as widely portrayed. The die was cast the moment Joe Biden’s predecessor, Donald Trump, signed a peace deal with the Taliban in February last year. Nobody took much notice of it at the time, but it was in essence a capitulation and it opened the door to today’s calamity.

Trump’s agreement was admittedly conditional on the Taliban reaching an accommodation with the then-ruling Afghan government, but that this would actually happen in practice was always for the birds; Trump would have known the conditions attached to the deal were a charade, and that what he was essentially doing was surrendering to the Taliban’s Islamic zealots.

The manner of Biden’s withdrawal is inexcusable, a frightful blunder, but that America would remove its troops and that this would lead to the Taliban’s final victory regardless of who was President was never in much doubt. Trump’s deal was a sham; things were probably always destined to end the way they did.

Much of the hysteria we see in the press – the worst blow to the West’s standing in the world since Vietnam, no worse still, and so on – is essentially just wounded amour propre. It doesn’t reflect the realpolitik of available alternatives, which were essential to carry on propping up a corrupt and incompetent incumbent government.


Shortly after 9/11, I was lucky enough to lunch with Eric Newby, who I knew a bit through my wife, and whose book, A short walk in the Hindu Kush – detailing a wonderfully amateurish attempt to climb one of Afghanistan’s highest mountains – remains to this day one of most outstanding, and funniest, pieces of travel writing of the post-war period. I asked him what he thought of the US/British invasion. “It’ll all end in tears”, he said.

“There is nowhere on earth as tribal and trigger happy as Afghanistan. They are very fierce and diverse people, and they do like to fight each other. But when the foreigner invades and attempts to bring order, they forget their differences and come together in some great Jihad to expel him. Once this is achieved, they go back to fighting each other”.

This may seem an unduly simplistic view of Afghan history, but it perfectly describes this long-standing graveyard for foreign interventionism. It’s best left alone. What’s happened looks terrible, and gives the impression that the West has lost its way. But wider economic implications? Well, geopolitical calamity often does have grave economic consequences, but the one doesn’t always follow from the other.

As for the next two negatives – rising delta variant infections and Fed tightening – they merely cancel each other out as possible downsides for the economy. As it is, the US’s delta variant surge is quite localized, largely confined as it is to states – Louisiana, Florida, Texas Arkansas, and so on – that have adopted a Trumpist, devil-may-care approach to Covid.

High levels of vaccine hesitancy go hand in hand with a bizarrely casual attitude rising hospitalizations and deaths. Survey evidence points to a sharp slowdown in August for the US economy, but we are still some distance away from an overt contraction.

And if Covid does end up cratering the economy anew, then presumably the Fed will once more shelve its plans for tapering so as to underpin things a while longer. We ought to get some thoughts on that later this week, when Jay Powell, the Fed chairman, speaks to the grand mufti of the monetary world – virtually, natch – at the annual Jackson Hole symposium. Either the delta variant doesn’t hold things back much, or the Fed accommodates for longer. For stock markets, both outcomes are equally benign.

As for China, policymakers are tightening, but with the economy now slowing fast, we’ll see how long they hold their nerve, as well as quite how serious they are in their declared crackdown on the excesses of the wealthy entrepreneurial class.

If truth be told, the biggest threat to the economy hasn’t changed for quite a while now and only tangentially has any bearing on the aforementioned worries. It’s not that things will slow too quickly, but that the economy will run too hot for too long, resulting in an excess of inflation and an abrupt handbrake turn by the Fed, causing activity to stall. Business expansions don’t die of old age, goes the saying; they are murdered by the US Federal Reserve. To the extent that the Fed attempts to counter all the other negatives by keeping policy looser for longer, it ironically increases the chances of this happening.

There are other big challenges on the horizon too. A recent paper by the Washington-based Peterson Institute economic think tank depicted the decarbonization of economies to reach net-zero targets as an adverse supply shock – very much like the oil shocks of the 1970s. Geopolitical events can have significant economic consequences – think 9/11, which lit the fuse on nearly a decade of unbridled credit expansion, culminating in the global financial crisis.

The Afghan debacle could similarly have wider consequences – for instance, another migrant crisis, and who knows where that would lead. But as I say, the bigger danger is still that of an overheating economy, not the immediate threat of a rapidly slowing one.

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