Month: September 2024

Authored by Jeffrey Sachs and Matt Taibbi via Racket News,

Editor’s note: thanks in large part to Ryan Grim, whose new “Drop Site” Substack can be found here, I rarely recommend subscribing to other sites, but am happy to support Drop Site, which Ryan co-founded with Jeremy Scahill and other Intercept veterans — an Intercept-in-exile. Through them I had an opportunity to interview economist Jeffrey Sachs, and read the eye-opening essay below. In a moment you’ll receive a companion piece that explains what was stunning to me, as a resident of Russia when “Shock Therapy” economic policies credited to Sachs were being applied. Below, Sachs reveals: we never even tried to end the Cold War.

How the Neocons Subverted Russia’s Financial Stabilization in the Early 1990s

by Jeffrey Sachs

In 1989 I served as an advisor to the first post-communist government of Poland, and helped to devise a strategy of financial stabilization and economic transformation.  My recommendations in 1989 called for large-scale Western financial support for Poland’s economy in order to prevent a runaway inflation, enable a convertible Polish currency at a stable exchange rate, and an opening of trade and investment with the countries of the European Community (now the European Union).  These recommendations were heeded by the US Government, the G7, and the International Monetary Fund.  

Based on my advice, a $1 billion Zloty stabilization fund was established that served as the backing of Poland’s newly convertible currency.  Poland was granted a standstill on debt servicing on the Soviet-era debt, and then a partial cancellation of that debt.  Poland was granted significant development assistance in the form of grants and loans by the official international community.  

Poland’s subsequent economic and social performance speaks for itself.  Despite Poland’s economy having experienced a decade of collapse in the 1980s, Poland began a period of rapid economic growth in the early 1990s.  The currency remained stable and inflation low.  In 1990, Poland’s GDP per capita (measured in purchasing-power terms) was XX% of neighboring Germany.  By 2020, it had reached YY% of Germany’s GDP per capita, following decades of rapid economic growth.  

On the basis of Poland’s economic success, I was contacted in 1990 by Mr. Grigory Yavlinsky, economic advisor to President Mikhail Gorbachev, to offer similar advice to the Soviet Union, and in particular to help mobilize financial support for the economic stabilization and transformation of the Soviet Union. One outcome of that work was a 1991 project undertaken at the Harvard Kennedy School with Professors Graham Allison, Stanley Fisher, and Robert Blackwill. We jointly proposed a “Grand Bargain” to the US, G7, and Soviet Union, in which we advocated large-scale financial support by the US and G7 countries for Gorbachev’s ongoing economic and political reforms. The report was published as Window of Opportunity: The Grand Bargain for Democracy in the Soviet Union (1 October 1991).

The proposal for large-scale Western support for the Soviet Union was flatly rejected by the Cold Warriors in the White House.  Gorbachev came to the G7 Summit in London in July 1991 asking for financial assistance, but left empty-handed.  Upon his return to Moscow, he was abducted in the coup attempt of August 1991.  At that point, Boris Yeltsin, President of the Russian Federation, assumed effective leadership of the crisis-ridden Soviet Union.  By December, under the weight of decisions by Russia and other Soviet republics, the Soviet Union was dissolved with the emergence of 15 newly independent nations.  

In September 1991, I was contacted by Yegor Gaidar, economic advisor to Yeltsin, and soon to be acting Prime Minister of newly independent Russian Federation as of December 1991. He requested that I come to Moscow to discuss the economic crisis and ways to stabilize the Russian economy. At that stage, Russia was on the verge of hyperinflation, financial default to the West, the collapse of international trade with the other republics and with the former socialist countries of Eastern Europe, and intense shortages of food in Russian cities resulting from the collapse of food deliveries from the farmlands and the pervasive black marketing of foodstuffs and other essential commodities.  

I recommended that Russia reiterate the call for large-scale Western financial assistance, including an immediate standstill on debt servicing, longer-term debt relief, a currency stabilization fund for the ruble (as for the Zloty in Poland), large-scale grants of dollars and European currencies to support urgently needed food and medical imports and other essential commodity flows, and immediate financing by the IMF, World Bank, and other institutions to protect Russia’s social services (healthcare, education, and others).

In November 1991, Gaidar met with the G7 Deputies (the deputy finance ministers of the G7 countries) and requested a standstill on debt servicing.  This request was flatly denied.  To the contrary, Gaidar was told that unless Russia continued to service every last dollar as it came due, emergency food aid on the high seas heading to Russia would be immediately turned around and sent back to the home ports.  I met with an ashen-faced Gaidar immediately after the G7 Deputies meeting.  

In December 1991, I met with Yeltsin in the Kremlin to brief him on Russia’s financial crisis and on my continued hope and advocacy for emergency Western assistance, especially as Russia was now emerging as an independent, democratic nation after the end of the Soviet Union.  He requested that I serve as an advisor to his economic team, with a focus on attempt to mobilize the needed large-scale financial support.  I accepted that challenge and the advisory position on a strictly unpaid basis.    

Upon returning from Moscow, I went to Washington to reiterate my call for a debt standstill, a currency stabilization fund, and emergency financial support.  In my meeting with Mr. Richard Erb, Deputy Managing Director of the IMF in charge of overall relations with Russia, I learned that the US did not support this kind of financial package.  I once again pleaded the economic and financial case, and was determined to change US policy.  It had been my experience in other advisory contexts that it might require several months to sway Washington on its policy approach.  

Indeed, during 1991-94 I would advocate non-stop but without success for large-scale Western support for Russia’s crisis-ridden economy, and support for the other 14 newly independent states of the former Soviet Union. I made these appeals in countless speeches, meetings, conferences, op-eds, and academic articles. Mine was a lonely voice in the US in calling for such support.  I had learned from economic history — most importantly the crucial writings of John Maynard Keynes (especially Economic Consequences of the Peace, 1919) — and from my own advisory experiences in Latin America and Eastern Europe, that external financial support for Russia could well be the make or break of Russia’s urgently needed stabilization effort.  

It is worth quoting at length here from my article in the Washington Post in November 1991 to present the gist of my argument at the time:  

This is the third time in this century in which the West must address the vanquished. When the German and Hapsburg Empires collapsed after World War I, the result was financial chaos and social dislocation. Keynes predicted in 1919 that this utter collapse in Germany and Austria, combined with a lack of vision from the victors, would conspire to produce a furious backlash towards military dictatorship in Central Europe. Even as brilliant a finance minister as Joseph Schumpeter in Austria could not stanch the torrent towards hyperinflation and hyper-nationalism, and the United States descended into the isolationism of the 1920s under the “leadership” of Warren G. Harding and Sen. Henry Cabot Lodge.

After World War II, the victors were smarter. Harry Truman called for U.S. financial support to Germany and Japan, as well as the rest of Western Europe. The sums involved in the Marshall Plan, equal to a few percent of the recipient countries’ GNPs, was not enough to actually rebuild Europe. It was, though, a political lifeline to the visionary builders of democratic capitalism in postwar Europe.

Now the Cold War and the collapse of communism have left Russia as prostrate, frightened and unstable as was Germany after World War I and World War II. Inside Russia, Western aid would have the galvanizing psychological and political effect that the Marshall Plan had for Western Europe. Russia’s psyche has been tormented by 1,000 years of brutal invasions, stretching from Genghis Khan to Napoleon and Hitler.

Churchill judged that the Marshall Plan was history’s “most unsordid act,” and his view was shared by millions of Europeans for whom the aid was the first glimpse of hope in a collapsed world. In a collapsed Soviet Union, we have a remarkable opportunity to raise the hopes of the Russian people through an act of international understanding. The West can now inspire the Russian people with another unsordid act.

This advice went unheeded, but that did not deter me from continuing my advocacy.  In early 1992, I was invited to make the case on the PBS news show The McNeil-Lehrer Report.  I was on air with acting Secretary of State Lawrence Eagleburger.  After the show, he asked me to ride with him from the PBS studio in Arlington, Virginia back to Washington, D.C.  Our conversation was the following.  “Jeffrey, please let me explain to you that your request for large-scale aid is not going to happen.  Even assuming that I agree with your arguments — and Poland’s finance minister [Leszek Balcerowicz] made the same points to me just last week — it’s not going to happen.  Do you want to know why?  Do you know what this year is?”  “1992,” I answered.  “Do you know that this means?”  “An election year?” I replied.  “Yes, this is an election year.  It’s not going to happen.”

Russia’s economic crisis worsened rapidly in 1992.  Gaidar lifted price controls at the start of 1992, not as some purported miracle cure but because the Soviet-era official fixed prices were irrelevant under the pressures of the black markets, the repressed inflation (that is, rapid inflation in the black-market prices and therefore the rising the gap with the official prices), the complete breakdown of the Soviet-era planning mechanism, and the massive corruption engendered by the few goods still being exchanged at the official prices far below the black-market prices.  

Russia urgently needed a stabilization plan of the kind that Poland had undertaken, but such a plan was out of reach financially (because of the lack of external support) and politically (because the lack of external support also meant the lack of any internal consensus on what to do).  The crisis was compounded by the collapse of trade among the newly independent post-Soviet nations and the collapse of trade between the former Soviet Union and its former satellite nations in Central and Eastern Europe, which were now receiving Western aid and were reorienting trade towards Western Europe and away from the former Soviet Union.  

During 1992 I continued without any success to try to mobilize the large-scale Western financing that I believed to be ever-more urgent.  I pinned my hopes on the newly elected Presidency of Bill Clinton. These hopes too were quickly dashed. Clinton’s key advisor on Russia, Johns Hopkins Professor Michael Mandelbaum, told me privately in November 1992 that the incoming Clinton team had rejected the concept of large-scale assistance for Russia. Mandelbaum soon announced publicly that he would not serve in the new administration. I met with Clinton’s new Russia advisor, Strobe Talbott, but discovered that he was largely unaware of the pressing economic realities. He asked me to send him some materials about hyperinflations, which I duly did.

At the end of 1992, after one year of trying to help Russia, I told Gaidar that I would step aside as my recommendations were not heeded in Washington or the European capitals.  Yet around Christmas Day I received a phone call from Russia’s incoming financing minister, Mr. Boris Fyodorov. He asked me to meet him in Washington in the very first days of 1993.  We met at the World Bank. Fyodorov, a gentleman and highly intelligent expert who tragically died young a few years later, implored me to remain as an advisor to him during 1993.  I agreed to do so, and spent one more year attempting to help Russia implement a stabilization plan. I resigned in December 1993, and publicly announced my departure as advisor in the first days of 1994.  

My continued advocacy in Washington once again fell on deaf ears in the first year of the Clinton Administration, and my own forebodings became greater.  I repeatedly invoked the warnings of history in my public speaking and writing, as in this piece in the New Republic in January 1994, soon after I had stepped aside from the advisory role.      

Above all, Clinton should not console himself with the thought that nothing too serious can happen in Russia. Many Western policymakers have confidently predicted that if the reformers leave now, they will be back in a year, after the Communists once again prove themselves unable to govern. This might happen, but chances are it will not. History has probably given the Clinton administration one chance for bringing Russia back from the brink; and it reveals an alarmingly simple pattern. The moderate Girondists did not follow Robespierre back into power. With rampant inflation, social disarray and falling living standards, revolutionary France opted for Napoleon instead. In revolutionary Russia, Aleksandr Kerensky did not return to power after Lenin’s policies and civil war had led to hyperinflation. The disarray of the early 1920s opened the way for Stalin’s rise to power. Nor was Bruning’sgovernment given another chance in Germany once Hitler came to power in 1933.

It is worth clarifying that my advisory role in Russia was limited to macroeconomic stabilization and international financing.  I was not involved in Russia’s privatization program which took shape during 1993-4, nor in the various measures and programs (such as the notorious “shares-for-loans” scheme in 1996) that gave rise to the new Russian oligarchs.  On the contrary, I opposed the various kinds of measures that Russia was undertaking, believing them to be rife with unfairness and corruption.  I said as much in both the public and in private to Clinton officials, but they were not listening to me on that account either.  Colleagues of mine at Harvard were involved in the privatization work, but they assiduously kept me far away from their work. Two were later charged by the US government with insider dealing in activities in Russia which I had absolutely no foreknowledge or involvement of any kind.  My only role in that matter was to dismiss them from the Harvard Institute for International Development for violating the internal HIID rules against conflicts of interest in countries that HIID advised.  

The failure of the West to provide large-scale and timely financial support to Russia and the other newly independent nations of the former Soviet Union definitely exacerbated the serious economic and financial crisis that faced those countries in the early 1990s.  Inflation remained very high for several years.  Trade and hence economic recovery were seriously impeded.  Corruption flourished under the policies of parceling out valuable state assets to private hands.  

All of these dislocations gravely weakened the public trust in the new governments of the region and the West. This collapse in social trust brought to my mind at the time the adage of Keynes in 1919, following the disaster Versailles settlement and the hyperinflations that followed: “There is no subtler, no surer means of over- turning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.” 

During the tumultuous decade of the 1990s, Russia’s social services fell into decline.  When this decline was coupled with the greatly increased stresses on society, the result was a sharp rise in Russia’s alcohol-related deaths.  Whereas in Poland, the economic reforms were accompanied by a rise in life expectancy and public health, the very opposite occurred in crisis-riven Russia.  

Even with all of these economic debacles, and with Russia’sdefault in 1998, the grave economic crisis and lack of Western support were not the definitive breaking points of US-Russian relations.  In 1999, when Vladimir Putin became Prime Minister and in 2000 when he became President, Putin sought friendly and mutually supportive international relations between Russia and the West.  Many European leaders, for example, Italy’s Romano Prodi, have spoken extensively about Putin’s goodwill and positive intentions towards strong Russia-EU relations in the first years of his presidency.  

It was in military affairs rather than in economics that the Russian – Western relations ended up falling apart in the 2000s.  As with finance, the West was militarily dominant in the 1990s, and certainly had the means to promote strong and positive relations with Russia.  Yet the US was far more interested in Russia’s subservience to NATO that it was in stable relations with Russia.  

At the time of German reunification, both the US and Germany repeatedly promised Gorbachev and then Yeltsin that the West would not take advantage of German reunification and the end of the Warsaw Pact by expanding the NATO military alliance eastward.  Both Gorbachev and Yeltsin reiterated the importance of this US-NATO pledge.  Yet within just a few years, Clinton completely reneged on the Western commitment, and began the process of NATO enlargement.  Leading US diplomats, led by the great stateman-scholar George Kennan, warned at the time that the NATO enlargement would lead to disaster: “The view, bluntly stated, is that expanding NATO would be the most fateful error of American policy in the entire post-cold-war era.” So, it has proved.

Here is not the place to revisit all of the foreign policy disasters that have resulted from US arrogance towards Russia, but it suffices here to mention a brief and partial chronology of key events.  In 1999, NATO bombed Belgrade for 78 days with the goal of breaking Serbia apart and giving rise to an independent Kosovo, now home to a major NATO base in the Balkans.  In 2002, the US unilaterally withdrew from the Anti-Ballistic Missile Treaty over Russia’s strenuous objections.  In 2003, the US and NATO allies repudiated the UN Security Council by going to war in Iraq on false pretenses.  In 2004, the US continued with NATO enlargement, this time to the Baltic States and countries in the Black Sea region (Bulgaria and Romania) and the Balkans.  In 2008, over Russia’s urgent and strenuous objections, the US pledged to expand NATO to Georgia and Ukraine.  

In 2011, the US tasked the CIA to overthrow Syria’s Bashar al-Assad, an ally of Russia.  In 2011, NATO bombed Libya in order to overthrow Moammar Qaddafi.  In 2014, the US conspired with Ukrainian nationalist forces to overthrow Ukraine’s President Viktor Yanukovych.  In 2015, the US began to place Aegis anti-ballistic missiles in Eastern Europe(Romania), a short distance from Russia. In 2016-2020, the US supported Ukraine in undermining the Minsk II agreement, despite its unanimous backing by the UN Security Council.  In 2021, the new Biden Administration refused to negotiate with Russia over the question of NATO enlargement to Ukraine.  In April 2022, the US called on Ukraine to withdraw from peace negotiations with Russia.  

Looking back on the events around 1991-93, and to the events that followed, it is clear that the US was determined to say no to Russia’s aspirations for peaceful and mutually respectful integration of Russia and the West.  The end of the Soviet period and the beginning of the Yeltsin Presidency occasioned the rise of the neoconservatives (neocons) to power in the United States. The neocons did not and do not want a mutually respectful relationship with Russia.  They sought and until today seek a unipolar world led by a hegemonic US, in which Russia and other nations will be subservient.

In this US-led world order, the neocons envisioned that the US and the US alone will determine the utilization of the dollar-based banking system, the placement of overseas US military bases, the extent of NATO membership, and the deployment of US missile systems, without any veto or say by other countries, certainly including Russia.  That arrogant foreign policy has led to several wars and to a widening rupture of relations between the US-led bloc of nations and the rest of the world.  As an advisor to Russia during two years, late-1991 to late-93, I experienced first-hand the early days of neoconservatism applied to Russia, though it would take many years of events afterwards to recognize the full extent of the new and dangerous turn in US foreign policy that began in the early 1990s.    

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Carlos Quiles was injured when his Uber driver crashed in May 2022. Now he’s in the midst of a ‘nightmare’ trying to recoup the insurance money necessary to pay for his medical bills, according to a new report from Bloomberg. 

He told Bloomberg: “From the very beginning, it was a nightmare. Each and every time you call, it’s at least 30 minutes hold time. And they either hang up on you or they transfer you to someone else.”

His driver lost control of his Toyota while swatting away an obstruction on the windshield. And Quiles, who needed surgery on his left shoulder due to the accident, is still awaiting payments from American Transit Insurance Co., the driver’s insurer. His lawyer has been negotiating with the New York-based company for nearly two years.

The Bloomberg report notes that many others also share frustrations with American Transit (ATIC), the largest insurer of commercial taxis and rideshare vehicles in the city, holding over 60% market share.

Even Uber Technologies Inc. is suing ATIC in federal court, accusing it of repeatedly failing to honor coverage for New York City rideshare drivers involved in accidents.

Uber claims these delays led to 23 lawsuits against the company and its drivers over crashes involving bodily injuries between May and August 2023. ATIC attorneys deny the allegations, but the lawsuit continues as the insurer faces financial trouble, reporting over $700 million in losses in the second quarter, prompting state regulatory intervention.

ATIC’s Chief Financial Officer, Christopher Ryan, and other company representatives did not respond to requests for comment, nor did the lawyers representing the taxi driver in the Quiles case. The company posted $700 million in losses in Q2, “breaching thresholds that require state regulators to intervene”, Bloomberg wrote. 

The report said that since 2021, a third-party actuary reviewing ATIC’s financial statements for the National Association of Insurance Commissioners has repeatedly stated that the company’s reserves are inadequate, a view disputed by ATIC’s executives.

Without new capital, ATIC risks being unable to pay claims or insure drivers, threatening the city’s transportation network, which relies on over 117,000 cabs. Even if another insurer steps in, drivers could face higher premiums.

Drivers insured by ATIC currently pay $4,000 to $6,000 annually, depending on factors like experience and claims history—rates competitors argue don’t match the risk. Fleet owner Dawood Mian warns that if ATIC raises premiums, costs could increase by 30%, further straining an industry already burdened by rising expenses and heavy debt from falling medallion values.

Meanwhile, drivers protested outside City Hall against Uber and Lyft for reducing their access mid-shift to fight a minimum wage rule, cutting their earnings.

New York’s Division of Financial Services is “working with the company and other stakeholders to address these longstanding financial issues, and protect drivers, passengers and the stability of the New York livery insurance market”, according to the report. 

Authored by James Gorrie via The Epoch Times,

If the rush to adopt artificial intelligence (AI) seems familiar, it’s because we’ve seen this movie before. In the late nineties, organizations of all sizes, but especially large or enterprise-level businesses, struggled to make the transition from legacy functionality to digital transformation. As late as the COVID-19 pandemic and global lockdown in 2020, enterprise organizations were rushing to complete their digital transitions, particularly when it came to enabling and protecting widely distributed remote workers with home office operations, workflows, and compliance regulations.

What’s more, an AI arms race is well underway, as Microsoft, Apple, and other tech firms invest billions into AI products such as OpenAI. Everyone knows full well, or should, just how intense the race to dominate AI is at the global and corporate levels. It’s that transformative.

AI Altering Business Practices

There’s no question that AI is the next technological advancement that will fundamentally alter our way of life in the very near future, and perhaps for evermore. In fact, it already is and continues to do so. But in these early and heady AI days, there are practicality speed bumps, too.

For example, corporate executives and boards are encountering implementation and control roadblocks that are preventing their organizations from realizing more than just a fraction of AI potential, not to mention justifying the millions of dollars in spending that an enterprise-level AI deployment costs in streamlining their operations, optimizing workflow, harmonizing siloed divisions, and other organizational challenges that enterprise-level organizations struggle to handle well.

But that’s just the beginning of the challenges and risks that AI poses to even mid-size businesses as well as enterprise-level organizations.

The Risk to Privacy and Ethics

The promise of AI lies not only in its speed of data analytics but in its utter power to quickly access—and potentially abuse access—to personal information. Individuals’ private data are shielded by their legal right to privacy, and the responsibility to protect that privacy falls upon organizations that possess private data. If an AI-driven program or product is abused or even just not monitored, the risk of an enterprise finding itself in violation of privacy laws rises.

There’s also the risk of bias perpetuation and the resulting social impact of any biases that are baked into the AI program. These may well include the personal beliefs of the AI programmer or servicer, with outcomes that harm certain people with personal beliefs that are counter to those that are in the AI programming.

Unlawful surveillance is another risk that AI brings to organizations of all sizes. Do people have the right not to be surveilled when engaging in activities on their time? Do they have the right to their behavior not being commoditized with predictive analytics and sold to the marketplace repeatedly? They should, but in practice, it’s much more a case of technology outrunning our legal system’s ability to address the new challenges and risks. The risk of technological change and capabilities is just too fast.

Bias In AI

It’s worth examining the biases in AI a bit more closely. The adage “garbage in, garbage out” applies to the risks and impact of bias in AI as it’s applied to human beings and their individual beliefs, behaviors, and opinions. This also applies to business conduct standards, privacy concerns, and whatever other aspect of a business that can be assessed and valued—or devalued—by a subjective AI-driven process or program.

This is simply because AI is a product of its creator and, therefore, the creator’s biases. Objectivity is difficult, if not impossible, to obtain or communicate with regard to moral and ethical questions, the value of deliberation over speed, the often-complex processes of negotiation and compromise, or current benefit versus future benefits, market goodwill, and so forth.

AI Integration Risks and Challenges

In practical terms, many enterprises are finding that integrating AI into their current operations is difficult and disruptive. In many, if not most cases, organizational growth is both organic and organized, streamlined as well as siloed. That is, business practices and workflow nuances have evolved over time, often as a result of personality quirks, personal relationships within and outside of the organization, established business practices, and other “human factor” reasons why a business operates as it does.

The process of integrating AI-driven systems into such nuanced organizations and their workflows can not only be costly but also fundamentally alter the organization itself in such a way as to make it unrecognizable to its own workforce and/or executives. It can also result in expensive compliance violations. Such risks make costly integrations with weak results a justifiable fear among boards and executives.

Data Security in AI

One of the biggest risks of adopting AI-driven systems is the speed at which they can access all data across an enterprise. Not only are new cyberattacks enhanced by AI, but once inside a network, hackers are often able to access undefended machine-based or even human identities to quickly leverage a firm’s AI-driven system to accelerate attacks and uncover protected data, enhance data theft, and carry out ransomware attacks, all exponentially quicker.

In effect, attackers can now use enterprises’ AI-driven systems to aid in their own data loss before they even know they’ve been breached. AI is essentially a tool that does the work of whoever controls it. This was the case with Microsoft’s Copilot for Microsoft 365, where researchers used Copilot to quickly locate and exfiltrate critical data with just a few prompts, something that no hacker could ever do before.

Legal Risks

Given that we live in a highly litigious society, the risks that AI poses to enterprises are significant and challenging. The truth is that AI-driven programs, tools, and solutions will continue to be rapidly adopted. At the same time, the risks to intellectual property, and the liability that AI represents to organizations in terms of regulatory compliance, accountability, privacy, and ethical concerns won’t go away any time soon.

Businesses and organizations are rushing to bring on AI and deploy it as soon as possible, if for no other reason that they don’t want to be left behind. “Innovate or die,” after all, isn’t just an over-the-top saying; for many firms, it’s a statement of fact.

Artificial intelligence is inevitable, no matter what I write in this article. Before too long, AI will be monitoring organizations across the nation and around the world. That transformation will be much quicker than the prior digital revolution in the economy, which took up to 20 years.

But in all of this, one obvious question remains: “Who monitors AI?”

On Wednesday Ukraine’s Foreign Minister Dmytro Kuleba announced his resignation amid an ongoing major Zelensky shake-up of his cabinet – which the biggest of the war – and has involved at least seven top officials and ministers being forced out in a ‘reboot’ aimed at staving off defeat amid the Russian invasion.

The following day Ukraine’s parliament voted to appoint Andrii Sybiha as the country’s top diplomat. He will now be the international face representing Kiev to countries abroad, just as Kuleba was for two-and-a-half years of war.

Sybiha is Ukraine’s former ambassador to Turkey and had previous to that served as deputy head of the presidential office. 

The Washington Post describes of his recent experience in government: 

Sybiha, a senior diplomat, left his role as Yermak’s deputy earlier this year to serve as deputy foreign minister. He was ambassador to Turkey from 2016 to 2021, an experience that was likely seen as an asset due to the critical role Turkey plays in the war.

The same publication says he will likely accompany Ukrainian President Volodymyr Zelensky in a trip to the Unites States later this month. Zelensky will be in New York for the United Nations General Assembly where he’s expected to unveil his “victory plan”.

It has been reported that this victory plan will at some point be presented to both presidential candidates Vice President Kamala Harris and former Republican President Donald Trump.

David Arakhamia, who is head of the ruling Servant of the People group in parliament, wrote on Telegram this week: “As promised, a major reboot of the government can be expected this week.” He identified that starting Wednesday there will be “lay-offs, and the day after . . . the day of appointments.”

Again, this big reboot appears a major cabinet and government reform effort toward securing greater and quicker Western support. It’s curious that the shake-up is happening just weeks before Zelensky is expected in the US.

The Washington Post recounts that “Ukraine blamed delays in U.S. support at that time for the fall of Avdiivka, a key eastern city where Ukrainian forces were outgunned. The fall of that city paved the way for Russian forces to advance steadily on the key transit hub of Pokrovsk.”

And Pokrovsk is now in Russian crosshairs. The eastern city is so vital as a key logistics hub for Ukraine that its probable collapse is likely result in Kiev finally losing the whole of Donetsk.

With oil trading at 2024 lows, despite a report earlier denying last week’s Reuters fake news that OPEC+ would hike output in October which sent oil prices tumbling, and despite last night’s API report that a whopping 7.4 million in crude oil were drawn in the past week with draws also in all other categories, moments ago the DOE confirmed what we warned recently, namely that as CTAs – and the Kamala/Biden oil trading desk – are aggressively shorting oil into oblivion, oil demand remains resilient and very soon we may hit tank bottoms…

Will be ironic if CTAs short oil all the way down to tank bottoms

— zerohedge (@zerohedge) September 3, 2024

… when it reported another huge draw in the last week. Here is what API reported yesterday, and what the DOE said this morning:

API

• Crude  -7.4mm (exp. -1mm)
• Gasoline -0.3mm
• Distillates -0.4mm
•    Cushing -0.8mm

DOE

• Crude  -6.873k (exp. -0.3mm)
• Gasoline +848k
• Distillates -371k
• Cushing -1.142mm

Of note, US Crude stocks declined for the 9th week in the past 10 (my much more than expected) as Gasoline inventories rose fractionally reversing 3 weeks of draws while distillates were flat. But what is perhaps most interesting is the continued drain of Cushing, where a few more weeks of this decline and everyone will be talking about tank bottoms.

One reason for the large oil draw is that in the past week, the Biden admin added a notable 1.8mm barrels to the SPR, the largest increase since June 2020.

That pushed the total US Crude stockpile down to its lowest since January…

The collapse in US inventories takes place as US crude production remained at an all time record high (and despite a continued decline in oil rigs).

And yet, despite the massive draw, despite the collapsing US inventories, despite the risk of tank bottoms in Cushing, and despite the OPEC+ decision not to hike output, WTI Crude prices extended their earlier losses as the bears are now fully in control of the energy complex.

The flip side is that with demand flat if not rising, there is only so much more inventory draws that can take place before there is an unprecedented paper price vs physical showdown, and a full-blown physical oil crisis that blows up in the shorting CTAs’ electronic faces.

Former President Trump plans to adopt Elon Musk’s proposed new commission, the Department of Government Efficiency abbreviated as ‘DOGE.’ According to The Wall Street Journal, Trump could unveil the new government efficiency commission as early as today. 

Trump plans to unveil the government efficiency commission before he delivers a speech at the Economic Club of New York. He will tell reporters that the commission would conduct “a complete financial and performance audit of the entire federal government” and make “recommendations for drastic reform.” 

The commission’s primary goal is to identify ways to eliminate fraud and improper payments, according to portions of the speech viewed by journos at WSJ. 

Trump’s upcoming speech and proposed commission to address the failures of Biden-Harris’ Bidenomics, which sparked an inflation storm and financially crushed mid—and low-tier consumers, also aims at deregulation. Trump has actively championed deregulation to make the economy great again.

Musk endorsed Trump on X shortly after the failed assassination attempt on July 13. He pledged millions of dollars to a super PAC supporting causes on the right. 

Speaking with Reuters last week, the former president said he would offer Musk a position if he were seriously interested. 

” He’s a very smart guy. I certainly would—if he would do it, I certainly would,” the former president said. “He’s a brilliant guy.”

Musk and Trump first publicly discussed a government efficiency commission during a two-hour conversation on X on August 13. The conversation has received 60.4 million views so far. 

pic.twitter.com/cPUMFx9Qu5

— Elon Musk (@elonmusk) August 13, 2024

Musk shared an AI picture last month of himself standing at a platform that read “Department of Government Efficiency” (DOGE) and wrote on X, “I am willing to serve.”

I am willing to serve pic.twitter.com/BJhGbcA2e0

— Elon Musk (@elonmusk) August 20, 2024

Earlier this week, Musk reiterated, “I can’t wait. There is a lot of waste and needless regulation in government that needs to go.” 

I can’t wait. There is a lot of waste and needless regulation in government that needs to go. https://t.co/BOh3MIv4sJ

— Elon Musk (@elonmusk) September 3, 2024

On X this morning, Musk responded to one user’s post about WSJ’s story. He said, “I look forward to serving America if the opportunity arises. No pay, no title, no recognition is needed.”

I look forward to serving America if the opportunity arises.

No pay, no title, no recognition is needed. https://t.co/5PSNtjBQn7

— Elon Musk (@elonmusk) September 5, 2024

Trump also plans to say, “This election will decide whether we reward Kamala Harris with re-election and four more years of economic calamity—or whether we change direction.” 

Let’s not forget that the federal government loses between $233 billion and $521 billion to fraud annually, or about $4,000 per American household, as per The Hill. 

Less than a week ago, when Reuters published a bullshit fake news report meant to hammer the price of oil, “reporting” based on six anonymous sources that OPEC+ will hike oil production in October, we countered that this is “absolute idiocy, and we expect that OPEC+ will issue an official denial within minutes, especially since Saudi Energy Minister Prince Abdulaziz bin Salman previously said OPEC+ could pause or reverse the production hikes if it decides the market is not strong enough, which it clearly is not right now!”

We didn’t have long to wait for the denial, and as we reported yesterday, ironically enough it was Reuters who reported that contrary to its own so-called “reporting” just days earlier, OPEC+ would actually delay the planned oil hike, much to the shock and horror of anyone who actually believed Reuters and saw it as an objective news source instead of a conflicted, manipulative potentially criminal generator of price volatility with its own bullshit reporting.

And then it all came together less than 24 hours later when, as we expected, OPEC+ confirmed – and Reuters again reported -that not only was the original fake news report BS, but that the October hike was not coming, would be delayed for at least 2 months, and most likely will be delayed until such time as China’s middle class revolts, forcing Beijing to finally flood the economy with stimulus and sends oil back to $150.

For those curious, here is the full Reuters bullshit arc in under a week.

Of course, by the time the official denial hit, the selling and shorting momentum ignited by the original fake report had sent oil sharply lower, allowing the manipulating sources to load up at much cheaper prices; and since meanwhile sentiment was fully reset, the price of oil has barely bounced on the subsequent denial, just as whoever leaked the original “story” had intended.

By Michael Every of Rabobank

Final Destination

Yesterday, stocks were mostly down, but Nividia was up after refuting its DOJ subpoena story; oil lower after an aborted rally; Treasury yields down as the US curve disinverted; and JPY up.

The Fed’s Beige Book noted consumer spending ticked lower in most Districts, activity “grew slightly” in three, and was flat or declined in nine, with isolated reports of firms only filling necessary positions, reducing hours and shifts, or lowering employment levels via attrition, even if layoffs were rare, wage growth modest, and input costs and selling price rises slight to moderate.

More focus was placed on JOLTS job openings at 7,673K vs 8,100K consensus, with the last print revised from 8,184K to 7,910K. However, as Zerohedge underlined, this survey represents just 0.8% of all US establishments, with only one in three of the small number of firms in the survey replying. Moreover, JOLTS relative to those unemployed is now back to where it was pre Covid, which was considered high at the time.

The BOC cut rates 25bp again to take the base rate to 4.25%, while promising more to come, but as Christian Lawrence and Molly Schwartz note, the Bank was keen to highlight decisions will be made meeting by meeting and are data dependent, with two opposing forces likely to impact the policy path: on the upside, shelter inflation and some services; on the downside, excess supply and labour market slack. The same is true in many locations. We expect two more BOC 25bp rate cuts this year to 3.75% by year end, and four 25bp cuts in 2025 to a terminal rate of 2.75%.

In short, the direction of travel is perhaps clear, but the final destination isn’t, at least relative to what the market is pricing for.

Meanwhile, in Canada, expect political turbulence. A federal election looms in 2025, and PM Trudeau just saw the New Democratic Party which helps keep his minority Liberal government in power withdraw its support. Trudeau will now have to find new alliances to govern.

Incredulously for those in every other democracy, tomorrow marks the start of early voting ahead of the US 5 November election ‘day’. Presumably, some voters don’t need to wait for the Harris-Trump debate, because it’s not like these can ever provide fresh angles(!); nor do they need to wait to see if key policy pledges change over time. Yet Harris is now lowering her proposed capital gains tax to 28%. Could there be electoral implications from President Biden saying he will block the proposed Nippon Steel takeover of Pennsylvania-based US Steel (on national security grounds) if, as US Steel says, without it jobs in this key swing state are “at risk”?

Showing this is going to be a looong two months: a prominent New York Democrat and several conservative media figures were accused of being influenced by China or Russia – they forgot Iran, which has influence elsewhere; Tucker Carlson and Elon Musk platformed an historian who says Churchill was a greater WW2 villain than Hitler, and the Holocaust was a catering error; and student protesters at Columbia demanded the “total collapse of the university structure and the American empire itself”; “to undermine and eradicate America as we know it”; and “unrest and violence in America.” We aren’t in Kansas anymore, Toto.

Although it isn’t a benchmark, the betting site Polymarket this morning in Asia had the odds of a Trump win at 53%.

With those kinds of headlines, it’s no coincidence the Financial Times has a long read today on ‘How national security has transformed economic policy’. One should read it; but let me add two things:

First, we made this call in January 2016. We flagged the US-China trade war a year before it started. We talked of Great Power struggles in 2018. We projected a ‘World of 2030’ in 2020. We warned Russia wasn’t joking about invading Ukraine in January 2022. And we flagged that the Suez Canal could be a victim of October 7 days after that attack. In short, we don’t just say “geopolitics.”

Second, this has vastly further to run. Wars in Ukraine and the Middle East have been transformative there. On Ukraine, obviously; yet Russia is now running a war economy, as some talk of a thanatopathic “Deathocracy” cultural shift to jihadi-style see-you-in-heaven mentality and staggering financial rewards for a soldier’s death; and Israel’s finance minister states its war vs. Hamas could cost 13% of GDP – before a potential escalation vs. Hezbollah and/or Iran.

Yet the US is still seeing real terms declines in its defence budget despite constant warnings of the looming dangers of this approach. The Wall Street Journal now bewails ‘The US Navy’s Chief Supplier Is in Peril’, and that a lack of crew mothballing of 17 sealift support ships will “embolden America’s foes.” Supply chains are not just about getting goods to shoppers, but to choppers. The ‘geopolitical’ bill to do so is going to be enormous.

Worse, Süddeutsche Zeitung reports Germany argues bridge and highway repairs are defence spending as public roads are used to transport tanks. In July, it declared €91bn in NATO spending, over the 2% target for the first time since the early 1990s. However, only €52bn was assigned to defence in its domestic budget, which included weapons for Ukraine, while much of the rest went on paperwork and pensions. Yes, good infrastructure is vital in war: the US interstate highway network was a Cold War response to ensure its troops could reach either coast in an emergency, while early European railways had military as much as commercial goals. However, these both went hand in hand with a military – having nice roads and no army just makes you easier to invade! In short, Germany, and most of Europe, aren’t taking things seriously yet. The EU needs to spend at least 3% of GDP, and much more of it on procurement, for decades. We already estimated the enormous annual cost of a “strategic autonomy” push: up to 6% of GDP, for years.

History is clear on how much more extreme geopolitics can get vis-à-vis markets even before we see war economies or war.

What starts off as trying to limit access to one kind of “strategic” good can widen into limiting access to all of them as whatever helps a civilian economy helps a military one directly or indirectly; tariffs can go much higher; subsidies can rise much further; full trade embargos can appear; and neutral countries can be dragged in, even to the extent of physical blockades on their ports, or at sea.

On the capital side, sanctions can be tightened against one party; but, as we flagged early, have to also be applied to third parties vigorously to be effective; capital controls can be introduced; and assets seized.

Commodities can be stockpiled by states; or stockpiles confiscated; and their trading ranges can be restricted, price- and geography-wise.

Moreover, fiscal and monetary policy can join at the hip, and markets can be told what to do, or to do nothing.

If any of the above were to be our final destination, then the market volatility we have seen so far from “geopolitics” is just the beginning. That remains true even if the near-term focus remains whether we see Fed rate cuts, RATE CUTS, or RATE CUTS!

After the disaster that was the Manufacturing surveys earlier in the week, the Services surveys are the ‘soft landing’-narrative-believers last great hope ahead of tomorrow’s all-important payrolls print to save the day.

• S&P Global’s Services PMI jumped from its flash print of 55.2 to a final August print of 55.7 (up from the 55.0 in July) – that is the highest since March 2022.

• ISM Services rose from 51.4 to 51.5 (barely beating the 51.4 expectations)

And all that ‘soft’ data improving as ‘hard’ data languishes…

Source: Bloomberg

ISM’s survey saw new orders improve, employment worsen and prices paid rise…

Commenting on the S&P Gloabl data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said:

“An improvement in the headline services PMI to its highest for nearly two-and-a-half years provides further encouraging evidence that the US economy is enjoying robust economic growth in the third quarter, adding to signs of a ‘soft landing’.

So everything’s awesome!? Why cut rates?

“The faster service sector expansion means the PMI surveys are signalling GDP growth of 2-2.5% in the third quarter.

At the same time, the August survey data signaled a further cooling of selling price inflation, notably in the service sector, which has now eased close to the average seen prior to the pandemic and a level consistent with the Fed’s 2% inflation target.

But – it;s a big circular joke…

“Services growth has been buoyed in particular by the prospect of lower interest rates, but there are several headwinds which could dampen growth in the months ahead. Business optimism and investment is being subdued by uncertainty regarding the outcome of the Presidential Election. Hiring is meanwhile being constrained by labor shortages, which also continue to put upward pressure on wages.

So wait – the survey is soaring because people expect rate cuts… which wont happen if the surveys are too strong? Reflexivity, anyone?

“However, perhaps more worryingly, the recent downturn in manufacturing activity is showing some signs of spilling over to the broader economy, notably via stalled orders for industrial services.

“It will therefore be important to monitor whether the service sector succumbs to the recent weakening of factory activity or whether looser monetary policy creates a rising tide to lift all boats.”

As always, baffle ’em with bullshit is back America! What elese would you expect in an election year.