Sanctions prompt bigger bloc formation: economist Steve Hanke

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TEHRAN – A professor of applied economics at Johns Hopkins University in Baltimore says the sanctions policy leads to the formation of coalitions against countries imposing the sanctions.

“Indeed, they often encourage the formation of larger coalitions that oppose the countries that impose the sanctions in the first place,” Steve H. Hanke told The Tehran Times.

“I oppose (sanctions) in principle because they interfere with free trade, and I oppose them in practice because sanctions rarely achieve the desired objective. “

As America does everything possible to put pressure on certain West Asian countries like Iran, Turkey and Lebanon through a policy of sanctions and by targeting their currencies, Hanke suggests that these countries install a fund. issue that issues convertible notes and coins on demand in an anchor foreign currency at a fixed rate. exchange, in order to save the value of their currencies.

Steve H. Hanke is the leading expert on hyperinflation and served on President Reagan’s Council of Economic Advisers.

Here is the text of the interview:

Q: What are the main reasons for the crash of the Turkish lira against the US dollar?

A: The main cause of the current Turkish Lira crash, as well as all the periodic crashes in the past, is the fact that Turkey has a central bank, which is currently controlled by President Recep Tayyip Erdogan. For Erdogan, low interest rates are a fatal attraction. What is the source of this attraction? To answer this question, we need to understand Islamic finance. It is full of theories about the harms of interest rates – theories adopted by Erdogan. Indeed, as he once clearly said, interest rates are the “mother of all evil”. Yes, President Erdogan’s economic ideas are fundamentally rooted in charismatic and medieval texts far removed from the real world of today, if not yesterday. But as long as the pound is issued by a central bank with discretionary powers, “low” rates will translate into a weak and vulnerable pound and relatively high and variable inflation rates. In other words, as long as Turkey’s central bank has discretionary monetary powers, Erdogan faces a dilemma.

Sanctions are for fools because they encourage potential enemies to form alliances against those who impose the sanctions. Q: Some other countries in West Asia, including Iran and Lebanon, have experienced the same currency crisis? What’s the story? Is it an economic war against them?

A: There is no external war against these countries. The problem is internal cancer, namely their central banks. Central banks are not appropriate in these countries if they want a stable currency.

Q: What solutions do you recommend to these three countries in general to boost the value of their currencies? Some West Asian experts suggest eliminating the dollar from bilateral trade.

A: Turkey, Lebanon and Iran could save their currencies by installing a currency board. A currency board issues convertible notes and coins on demand in an anchor foreign currency at a fixed exchange rate. It is required to hold anchor currency reserves equal to 100 percent of its monetary liabilities, and it generates profits from the difference between the interest it earns on its reserve assets and the expense of maintaining its liabilities. .

By design, a currency board has no monetary discretion and cannot issue money to its own credit. It has an exchange rate policy – the exchange rate is fixed – but no monetary policy. Its operations are passive and automatic. The only function of a currency board is to exchange the national currency it issues for an anchor currency at a fixed rate. Therefore, the amount of national currency in circulation is entirely determined by market forces, i.e. the demand for national currency. Since the domestic currency is a clone of its anchor, a currency? country at large is part of the unified monetary area of ​​an anchor country.

A currency board does not require any preconditions and can be installed quickly. Public finances, state-owned enterprises, and commerce do not need to be reformed before a currency board can issue money. I know this from personal experience because I was the architect who installed currency boards in Estonia (1992), Lithuania (1994), Bulgaria (1997) and Bosnia and Herzegovina (1997).

Q: Do you think countries that have faced US sanctions can form an economic coalition to avoid the negative effects of sanctions? Something like the EU or Shanghai cooperation in dealing with unilateral US sanctions. Is it useful? If so, to some extent?

A: The question you are asking me is interesting because I am always and everywhere opposed to sanctions. I oppose them in principle because they interfere with free trade, and I oppose them in practice because sanctions rarely achieve the intended objective. Indeed, they often encourage the formation of larger coalitions that oppose the countries that impose the sanctions in the first place.

Let me give you an example of how I actively fought against sanctions. I was involved in saving the Hong Kong system from what would have been a fatal blow. One Sunday afternoon in July 2020, Secretary of State Mike Pompeo called me. He indicated that the United States would impose financial sanctions on Hong Kong, and that a final decision would be made by President Trump the next day. But, before the White House meeting, Secretary Pompeo had been tasked with getting my advice. We spoke by phone for 35 minutes. Pompeo was adamantly in favor of sanctions. I was categorically against it. Monday afternoon, the White House called me to say, “Hanke, you won. There will be no financial sanctions against Hong Kong and its currency board.

Q: Considering China’s economic boom, don’t you think this country will become a haven for countries suffering from US sanctions? Don’t you think the United States is pushing Turkey and Lebanon towards the arms of China and Russia through its sanctions policy?

A: As I indicated in my answer to your previous question, sanctions are for fools because they encourage potential enemies to form alliances against those who impose the sanctions.

(The views expressed in this interview do not necessarily reflect those of The Tehran Times.)


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