Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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August 30, 2021

Afghanistan is expendable, the bond market isn’t

Another Failed Foreign Adventure 


The US withdrawal from Afghanistan has been compared with the 1975 evacuation from Saigon and their humiliation at the hands of the Viet Cong, or as the locals called them, the National Liberation Front of South Vietnam. Others have compared the damage to Joe Biden with the impact of the Iran Hostage Crisis, which helped limit Jimmy Carter to a single term president. I would add consideration of the Bay of Pigs, based, as it was, on the shared delusion that any occupied population would welcome the West and its notions of liberal democracy with open arms. That failed invasion drove Castro further into the arms of the Soviet Union and led directly to the Cuban Missile Crisis the following year, an event that took the world to the brink of nuclear war.

When the invasion landed on Cuba in 1961, the CIA and the State Department agreed that locals desperate to unshackle themselves from the evils of communism would be supportive. As recently as July 8th this year, as the FT pointed out, Joe Biden said that the Afghan military was “better trained, better equipped and more competent in terms of conducting war” than the Taliban, who were “highly unlikely” to end up “overrunning everything and owning the whole country”. The US Administration’s failure to comprehend the speed with which the Taliban assumed power, and the disbelief emanating from the media, suggests that the Americans have learnt nothing about foreign policy in the last 60 years.

Two main reasons could explain the collective failure to realise the situation’s threat. First, the Americans could have underestimated the local popularity of the Taliban. Second, they could have overestimated the lack of conviction the government they installed had to the underlying cause of the adoption of western liberal values and policies. The answer is probably a bit of both. What is clear is that the potential for unintended consequences is now mind-boggling.

Throwing Money at the Problem


There are parallels between the administration of  Kabul and the management of our financial world. The cost of the US occupation of Afghanistan over the past 20 years was $1tn. That’s $50bn a year. Afghanistan’s GDP is just $20bn pa, and it has a population of 38m. The sheer scale of US annual spending power at two and a half times Afghanistan’s GDP, sufficient for $1.3m for each Afghan, has dwarfed everything else. For all the claims that the last 20 years were not in vain, Afghanistan had become an economy powered by corruption and bundles of dollar bills.

Meanwhile, in the US today, the Federal Reserve is spending $120bn a month ($1.4tn pa) on buying assets such as US Treasuries and mortgage-backed securities. In the context of US GDP of $21tn pa, this may not be an overwhelming amount. It is, however, corrosive and corruptive to the system it serves. Similarly to the mission in Afghanistan, the occupation of the bond market by the Federal Reserve has become susceptible to mission creep. The control of inflation and the preservation of the value of the US $ are the Fed’s equivalent of the military occupation of Afghanistan’s objective to pursue the post 9/11 War on Terror. Twenty years on the mission in Afghanistan is being justified by the number of women in employment and education, while the Fed is targeting full employment, helping the world combat climate change, racial and gender equality and promoting social inclusion. There is no dispute that these are all noble and worthy causes. It is just that none of them was part of the original plan.

The main difference in this comparison is that while Afghanistan and its people were ultimately considered expendable by the US government, the financial markets and its participants are not. For all the talk of how they might start to withdraw their infiltration of the bond market, there was nothing set in stone, no timetable for withdrawal announced in Jay Powell’s keynote address from a virtual Jackson Hole. Indeed the bond market’s reaction to what was said implies that most participants don’t believe they will or even perhaps can. This particular occupation has longer to run.

When Things Get Real 


If neo-conservativism is the guiding principle of US foreign policy, then Modern Monetary Theory (MMT) is the more recently adopted underpinning of its economic policy. MMT (or what Jim Rogers calls More Money Today) holds that governments can directly monetise their debt ad infinitum without monetary penalty or cost. The neo-con foreign policy doctrine teaches that the West can and should use military might to spread liberal democratic values to areas of the world unfamiliar with its tenets. Joe Biden has just learnt the real cost of a neo-con foreign policy. When the bill becomes due for the lesson on MMT, we can expect a similar reaction of shock and disbelief.

Politicians build cloaks of narratives that they know are not credible. A process brilliantly depicted by Adam Curtis as Hypernormalisation (they know we know they lie). The Soviet system was known within to be unsustainable, but virtually nobody could afford to admit it until it collapsed. I suspect that the same held for the US-backed government of Afghanistan. As for the bond market and the other asset markets it underpins, it is harder to say, but when it happens, it will be a similarly massive shock to the liberal consensus and involve a problematic regime change. In the meantime, make sure you maintain some insurance of real asset exposure in your portfolio.



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