QE and Its Apologists

My friend Tom Bentley sends me political rants every day and then attaches an article from someone. Today’s is from Brian Wesbury, a brilliant economist who packs a thoughtful free-market punch. I mention Tom because I want to also pass on you the note he sent me this morning, introducing Brian. Here’s an excerpt (and Tom’s full note appears below, as a preface to Brian’s piece):

As we continue to suffer under the blizzard of bullshit about everything put out by both sides, and hugely amplified by the media, it’s nice to find a feel-good piece that takes us back to the basics. Much of what Brian writes in the first part are things you have heard from me before. Markets are inherently cyclical and inherently volatile, but they do self-correct before inflicting massive damage.

Now you put government in the mix, it zigs when it should have zagged, and all hell breaks loose. Think of it as an airplane in a storm – it bounces around, people grab their air-sickness bags, then the plane lands and all is fine. Now let’s assume the hand of God intervenes and grabs a wing of the plane in an effort to stop the shaking – the wing will break off, and the plane will start it’s death spiral. Think of mark-to-market accounting rules that Brian describes below as the built-in clasp on the wing, then the regulators refused to let go when the banks hit turbulence.

Seriously good economic news has gotten to be something of an outside-the-box commodity, but that’s what Tom and Brian have for us today.

I find myself in a literally freezing Sonoma Valley. Thank goodness the weather app gave me a heads-up, as most of the attendees at this gathering came expecting “California weather.” I am listening to a few of the people who will also be at my conference make private presentations. Powerful. Has me excited.

Technology has bitten me and I am having to do this intro on my iPad keyboard, typing with one finger. First-world problem. Thinking back 25 years, my choices then would have forced me to be at my office, wielding a pen and yellow pad, and then I’d fax the thing off on my big old clunky fax machine. (Or, if I was on the road, I’d have to pay a king’s ransom to fax.) So I like where we’re going with these technologies. In 10-15 years what we’re doing today will seem so last-century – we forget how fast things are changing, and for the better. It’s no wonder that businesses that “get it” are seeing earnings grow. Those that don’t get it get left behind – creative destruction.

Sidebar: There is going to be more creative destruction in the next decade or two than in all of last century. We are going to have to be able to absorb new ideas and technologies and keep on moving and growing. And do it all over again the next year or even the next month.

It will be the most exhilarating time in history for entrepreneurs and businesses that get it. And difficult for all of us, because central banks and governments will present us with “issues” that will require of us even more creativity – but that’s what free markets and nimble managers are good at.

Lots of moving parts, which will require you to work more and to focus better. Most of us will need an extensive network and trusted sources to help us keep up.

Have a great week. We will talk about inflation and central banks this weekend. I hope to add to your understanding of how it all fits together.

Your trying to put all the puzzle pieces in place analyst,

John Mauldin, Editor

Tom Bentley’s introduction:

Brian at his best

As we continue to suffer under the blizzard of bullshit about everything put out by both sides, and hugely amplified by the media, it’s nice to find a feel-good piece that takes us back to the basics. Much of what Brian writes in the first part are things you have heard from me before. Markets are inherently cyclical and inherently volatile, but they do self-correct before inflicting massive damage. Now you put government in the mix, it zigs when it should have zagged, and all hell breaks loose. Think of it as an airplane in a storm – it bounces around, people grab their air-sickness bags, then the plane lands and all is fine. Now let’s assume the hand of God intervenes and grabs a wing of the plane in an effort to stop the shaking – the wing will break off, and the plane will start it’s death spiral. Think of mark-to-market accounting rules that Brian describes below as the built-in clasp on the wing, then the regulators refused to let go when the banks hit turbulence.

During the Obama years, government loved to take credit for putting out a fire that government had started, but truth lies elsewhere. It’s now becoming apparent that our private sector is as strong as it ever was, and still able to kick ass everywhere if we just let it. American business has the secret sauce, and no other country has been able to challenge us at the leading edge (they do kick our ass in the old stuff, like steel and cars). Absorb this: "Corporate earnings are rising rapidly, too, and the S&P 500 is now trading at roughly 17.5 times 2018 expected earnings. This is not a bubble, not even close. Earnings are up because technology is booming in a more politically-friendly environment for capitalism. And while it is hard to see productivity rising in the overall macro data, it is clear that profits and margins are up because productivity is rising rapidly in the private sector.” That last point is important, and will make my friend John smile. Three sectors have been a drag on productivity – housing, education, and medical care – and they have been masking all the gains elsewhere. Even then, medical productivity is way up if we judge by longer, healthier lives, but we have no way to capture the value of that in national aggregates. Keep in mind, part of the reason profits are booming is that the overseas share has been increasing, which explains why profits and stock prices have been able to grow much faster than GDP.

Amidst all that success, the failure lobby is still hard at work: "The sad thing about the story that QE saved the economy is that it undermines faith in free markets.” I explained a few days ago that monetary economics is one step away from voodoo, and the world would be much further ahead if the gold standard were still the norm. But that genie is never going back in her bottle, so we have to live with the modern-day version of children running with scissors (shoutout to Patsy for that one), which is Big Government types and the sycophants they appoint to the Federal Reserve getting seduced by their newfound powers. “Give a mouse a cookie, he’s gonna want a glass of milk…."

QE and Its Apologists

By Brian S. Wesbury, Chief Economist; Robert Stein, CFA, Dep. Chief Economist; and Strider Elass, Economist, First Trust Advisors LP

On March 9, 2018, the bull market in U.S. stocks will celebrate its ninth anniversary. And, what we find most amazing is how few people truly understand it. To this day, in spite of massive increases in corporate earnings, many still think the market is one big “sugar high” – a bubble built on a sea of Quantitative Easing and government spending.

While passing mention is given to earnings (because they are impossible to ignore), conventional wisdom has clung to the mistaken story that QE, TARP, and government spending saved the economy from the abyss back in 2008-09.

A review of the facts shows the narrative that “Wall Street” – meaning capitalism and free markets – failed and government came to the rescue is simply not true.

Wall Street was not the driving force behind subprime mortgages. In his fabulous book, Hidden in Plain Sight, Peter Wallison showed that by 2008 Fannie Mae, Freddie Mac and other government programs had sponsored 76% of all subprime debt – not “Wall Street.” Everyone was playing with rattlesnakes and government was telling them it was OK to do so. But, when the snakes started biting, government blamed the private sector, capitalism and free markets.

At the same time, Wall Street did not cause the market and economy to collapse; it was overly strict mark-to-market accounting. Yes, leverage in the financial system was high, but mark-to-market accounting forced banks to write down many performing assets to illiquid market prices that had zero relationship to true value. Mark-to-market destroyed capital.

QE started in September 2008, TARP in October 2008, but the market didn’t bottom until March 9, 2009, five months later. On that day in March, former U.S. Representative Barney Frank, of all people, promised to hold a hearing with the accounting board and SEC to force a change to the ill-advised accounting rule. The rule was changed and the stock market reversed course, with a return to economic growth not far behind.

Yes, the Fed did QE and, yes, the stock market went up while bond yields fell, but correlation is not causation. Stock markets fell after QE started, and rose after QE ended. Bond yields often rose during QE, fell when the Fed wasn’t buying, and have increased since the Fed tapered and ended QE.

A preponderance of QE ended up as “excess reserves” in the banking system, which means it never turned into real money growth. That’s why inflation never took off. Long-term bond yields fell, but this wasn’t because the Fed was buying. Bond yields fell because the Fed promised to hold short-term rates down for a very long time. And as long-term rates are just a series of short-term rates, long term rates were pushed lower as well.

We know this is a very short explanation of what happened, but we bring it up because there are many who are now trying to use the stock market “correction” to revisit the wrongly-held narrative that the economy is one big QE-driven bubble. Or, they use the correction to cover their past support of QE and TARP. If the unwinding of QE actually hurts, then they can argue that QE helped in the first place.

So, they argue that rising bond yields are due to the Fed now selling bonds. But the Fed began its QE-unwind strategy months ago, and sticking to its plans hasn’t changed a thing.

The key inflection point for bond yields wasn’t when the Fed announced the unwinding of QE; it was Election Day 2016, when the 10-year yield ended the day at 1.9% while assuming the status quo, which meant more years of Plow Horse growth ahead. Since then, we’ve seen a series of policy changes, including tax cuts and deregulation, which have raised expectations for economic growth and inflation. As a result, yields have moved up.

Corporate earnings are rising rapidly, too, and the S&P 500 is now trading at roughly 17.5 times 2018 expected earnings. This is not a bubble, not even close. Earnings are up because technology is booming in a more politically-friendly environment for capitalism. And while it is hard to see productivity rising in the overall macro data, it is clear that profits and margins are up because productivity is rising rapidly in the private sector.

The sad thing about the story that QE saved the economy is that it undermines faith in free markets. Those who argue that unwinding QE is hurting the economy are, in unwitting fashion, supporting the view that capitalism is fragile, prone to bubbles and mistakes, and in need of government’s guiding hand. This argument is now being made by both those who believe in big government and those who supposedly believe in free markets. No wonder investors are confused and fearful.

The good news is that QE did not lift the economy. Markets, technology and innovation did. And this realization is the key to understanding why unwinding QE is not a threat to the bull market. 

Why U.S. Oil Drillers Are Flooding the World

Projections indicate the U.S. could pump more oil than Saudi Arabia, the biggest producer in OPEC

By Spencer Jakab

U.S. Net Oil Imports

As oil rebounded last year, it seemed that the U.S. shale patch had found religion—the worship of cash flow. That would have been both bullish for oil prices and, in the long run, good for investors in those companies.

The brief era of discipline by drillers is over. Analysts at Raymond James surveyed about 150 industry representatives last week at the North American Prospects Expo, a large industry gathering. Only 9% predicted that U.S. exploration and production companies would “live within cash flows” with crude at $60 a barrel.

The analysts concluded that “there still appears to be a fairly significant disconnect between what investors want to see E&Ps do and what industry representatives think E&P companies will do.”

The drilling of a horizontal well in west Texas Permian Basin near the town of Mertzon, Texas. Photo: terry wade/Reuters        

A report released Tuesday by the International Energy Agency put an exclamation point on the consequences for the global oil market. Even though the agency sees ample demand growth this year, it said that “producers are enjoying a second wave of growth so extraordinary that in 2018 their increase in liquids production could equal global demand growth.”

Reports in recent days from the Organization of the Petroleum Exporting Countries and the U.S. Energy Information Administration both ratcheted expectations of U.S. output higher.

The cartel’s monthly report predicted that non-OPEC supply growth this year would be higher than previously projected at 1.4 million barrels a day, nearly all of which would come from U.S. shale producers.

The EIA said last week in its Annual Energy Outlook that U.S. output would reach a record 11 million barrels a day by the fourth quarter of 2018, a year ahead of schedule. Perhaps even more impressive is the agency’s prediction that the U.S. could become a net oil exporter in four years.

Even at this year’s projection, the U.S. would pump more than Saudi Arabia, the biggest producer in OPEC. While not yet an exporter, U.S. production would equal that of four Kuwaits, 10 Algerias, 20 Ecuadors or 55 Gabons. Net crude imports have dropped below 3 million barrels a day compared with nearly 13 million roughly 12 years ago when President George W. Bush said in his State of the Union speech that America was “addicted” to oil from unstable countries.

What is different between the U.S. and OPEC is that shale production is heavily dependent on price and reliant on constant reinvestment of cash flows. The recent 10% slide in U.S. benchmark crude, in part a response to lofty supply projections, that has pushed it below $60 is enough, in theory, to take marginal wells off the drawing board. Energy executives don’t seem to be blinking, though.

If the drillers keep drilling, prices could tumble as supply grows. That would hurt profits of all producers, but more important would make investors wary of buying into shale producers when prices tick up again.

Chaos in Berlin

Schulz, Merkel and How Not to Negotiate a Coalition


SPD leader Martin Schulz (right) together with Andrea Nahles, who is set to replace him.

It looked like Martin Schulz of the Social Democrats had finally one-upped Chancellor Merkel.

But then, just as his party secured key cabinet positions in Germany's potential new government, he messed everything up. And Merkel's position isn't much better.

Admittedly, it has been a few years since Germany's Social Democrats (SPD) have experienced anything close to a political triumph. But the enthusiasm with which the center-left party has embraced chaos just as it looked as though leader Martin Schulz had finally one-upped Chancellor Angela Merkel in the country's endless search for a coalition government has nevertheless been breathtaking. And the upshot on both sides of the aisle is bewildering: Schulz has renounced claims to a cabinet position and appears to be heading for the backbenches while the SPD leadership has so deeply infuriated the base that it's unclear whether they will approve the coalition deal at all.

Meanwhile, Merkel has sold the family silver to stay in power and stirred her erstwhile catatonic party, the Christian Democratic Union (CDU), into a potentially revolutionary fury.

"It seems that the worse the SPD does in elections and the louder the party's grassroots gripes, the more concessions the CDU ... has to make in negotiations to make the SPD happy," grumbled Wolfgang Bosbach, a long-serving CDU parliamentarian. "How small do the conservatives want to make themselves?"

Bosbach was referring to the outcome of the coalition negotiations last week between Merkel's CDU, Schulz's SPD and the Christian Social Union (CSU), the Bavarian sister party to the CDU. After months of unsuccessfully trying to assemble a government, Merkel was beginning to get desperate, and the result of that desperation was on full display last Wednesday. Despite emerging from the election last September as the strongest party, the CDU will not end up holding any key cabinet positions in Merkel's next government, should the deal ultimately be approved. In a seemingly unending night of haggling, Schulz walked away with the powerful Finance Ministry, the Foreign Ministry and the Ministry of Labor and Social Affairs. The Interior Ministry, meanwhile, ended up going to the CSU, with party leader Horst Seehofer likely to move to Berlin to take over the portfolio.

It was a masterful bit of negotiating by Schulz. But even before the talks had come to an end, he had quietly agreed to step aside as SPD head. The party, after all, had grown increasingly unhappy with Schulz's leadership in recent weeks, prompting him to arrange a deal with floor leader Andrea Nahles that she should take the SPD reins while he would be given the consolation prize of the Foreign Ministry. It would be, they hoped, the moment when the party could finally turn the page and begin rebuilding.

An Unhappy End

Their agreement was announced last Wednesday. For years, though, the once-proud SPD has shown a unique knack for making the worst of a bad situation. And on Friday, the party leadership was forced by internal grumbling to reverse course, with Martin Schulz now saying that he won't be seeking a cabinet position at all. In other words, the appearance on the stage of German national politics has come to an unhappy end.

Schulz's hold on the party leadership, of course, has been rather tenuous ever since the SPD managed just 20.5 percent last September 24, the party's lowest postwar result in a nationwide election ever. Initially, a sense of euphoria had surrounded the politician after he ended his career in Brussels, where he had been president of the European Parliament, to helm the Social Democrats back at home in Germany, but he quickly lost traction in the race against Merkel. Immediately after the election, Schulz pledged that his party would not join Merkel as a junior coalition partner, a promise he repeated after Merkel's first attempt to form a government collapsed in November. He also said he would never join a cabinet led by Merkel.

But then, faced with the decidedly unappetizing prospect of new elections, he reversed course. And the further talks with the conservatives progressed, the lower the SPD slipped in the polls - to just 17 percent in a survey released last Monday, just two percentage points ahead of the right-wing populist Alternative for Germany (AfD).

Schulz began to realize that his end was nigh in January. When announcing that the SPD was reversing course and would enter exploratory talks with Merkel's conservatives on forming a new governing coalition, he promised that the SPD grassroots would be allowed to vote on any deal that emerged. Should they reject the deal, Schulz knew that he would be history. But even as talks progressed, he began speaking with Andrea Nahles about turning over the leadership of the SPD to her, a rough plan that became more realistic with her passionate speech at a party summit on January 21 in Bonn.

The two began discussing the precise timing of the leadership change and the idea that Schulz would be given the post of foreign minister in Merkel's new cabinet. And when coalition negotiations finally came to an end on Wednesday morning, senior party leaders came together to grant their approval of the Schulz/Nahles plan on condition of the party grassroots approving the larger coalition deal with Merkel. There was no opposition voiced during that Wednesday meeting and Schulz informed his erstwhile friend and predecessor Sigmar Gabriel, who currently holds the Foreign Ministry portfolio and has indicated his desire to hang onto the position.

Breaking Its Word

It wasn't long, though, before senior SPD members did begin voicing their disapproval of the backroom deal. "I wish that you wouldn't join the cabinet," said Martin Dulig, head of the SPD state chapter in Saxony, at a meeting a short time later. In the powerful SPD chapter in North Rhine-Westphalia, anger was likewise swelling, a state of affairs that could ultimately endanger the entire coalition deal once it is put up to a grassroots vote. Then, last Thursday evening, Gabriel released a statement accusing the SPD leadership of a lack of respect and of breaking its word.

By Friday morning, the explosiveness of the situation had become clear to all, with SPD leaders in states around the country calling in to report deep grassroots dissatisfaction - and concern began to grow that the leadership debate could lead party members to vote against the coalition with Merkel. There was only one way out and Schulz reluctantly took it. "I hereby relinquish my claim to a cabinet position and hope that my decision will put an end to the leadership debate within the SPD," he said.

With that, the Schulz experiment has ended. Nahles could take over party leadership as early as Tuesday.

One might, of course, assume that the SPD implosion would put the CDU in a mood to celebrate. But the hangover from the tough coalition negotiations has proven difficult to shake. Indeed, Merkel's decision to sacrifice all key ministries to the SPD and CSU has led to significant criticism of the party leadership in the CDU as well.

Merkel believed she had little choice but to make the cabinet concessions to ensure that the 464,000 SPD members would ultimately approve the deal. After her first attempt to form a coalition failed, she knew that a second failure would likely mean the end of her political career and yet more political chaos in Germany.

But it remains unclear whether she has, in fact, forestalled the end of her tenure or merely accelerated it. Every established party in Germany has recently gone through a phase of renewal and upheaval in recent years with the exception of the Christian Democrats. Now, though, after 18 years under Merkel's leadership, and 12 of those as chancellor, it is beginning to look as though a willingness is growing within the CDU to criticize its leader.

Blackmailing the Conservatives

"Whew! At least we managed to hang onto the Chancellery!" tweeted CDU parliamentarian Olav Gutting sarcastically after the negotiation results were announced. Anger was prevalent higher up the pecking order as well. "The Social Democrats managed to get a lot," complained Daniel Günther, CDU governor of the state of Schleswig-Holstein.

Notably, though, the anger this time isn't limited to individual voices as has traditionally been the case when it comes to criticism of Merkel. Her ability to constantly keep a tight lid on possible intra-party uprisings has long been a hallmark of her tenure, but that lid appears to have come ajar. And as is generally the case within the SPD, it is the youth wing of the CDU that has been the most vocal. The youth chapter in Bremen said last week it was "extremely disappointed" and issued a demand that the CDU form a minority government. The CDU's youth chapter in Berlin noted that the SPD was "completely" successful with its strategy of blackmailing the conservatives.

At a meeting of CDU parliamentarians in Berlin last Wednesday, the mood was dark indeed.

One long-time representative complained that he saw "no good reason at all" for Merkel to have given up all of the key portfolios. And Paul Ziemiak, head of the party's nation-wide youth wing, said that he hasn't heard a single positive comment about the negotiation results from the CDU grassroots. Sylvia Pantel, a parliamentarian from North Rhine-Westphalia agreed, saying the negotiation results will be almost impossible to sell to supporters back home in her district.

Many of the voices that have criticized Merkel in recent days are not new to the ranks of her doubters. And it is considered highly unlikely that the Christian Democrats would vote against the new coalition government between the CDU, CSU and SPD. It's also unlikely that Merkel must immediately fear a revolt from within her party -- she and those close to her still remain far more powerful than their adversaries within the CDU.

In an interview on public broadcaster ZDF on Sunday, however, Merkel sought to exude confidence. "I ran for a four-year term," she said. "And I'm someone who keeps promises."

Still, she did allow that change might be on the horizon. "Now it's about giving an opportunity to those whose political future is still ahead of them or who are right in the middle of it," she said. "We'll do everything possible to give these people a chance."

The World Bank Needs to Return to Its Mission

Jeffrey D. Sachs

An Indian woman picks out lemons left discarded as rotten on the edge of a vegetable market

NEW YORK – The World Bank declares that its mission is to end extreme poverty within a generation and to boost shared prosperity. These goals are universally agreed as part of the Sustainable Development Goals. But the World Bank lacks an SDG strategy, and now it is turning to Wall Street to please its political masters in Washington. The Bank’s president, Jim Yong Kim, should find a better way forward, and he can do so by revisiting one of his own great successes.

Kim and I worked closely together from 2000 to 2005, to scale up the world’s response to the AIDS epidemic. Partners in Health, the NGO led by Kim and his colleague, Harvard University’s Paul Farmer, had used antiretroviral medicines (ARVs) to treat around 1,000 impoverished HIV-infected rural residents in Haiti, and had restored them to health and hope.

I pointed out to Kim and Farmer 18 years ago that their success in Haiti could be expanded to reach millions of people at low cost and with very high social benefits. I recommended a new multilateral funding mechanism, a global fund, to fight AIDS, and a new funding effort by the United States.

In early 2001, UN Secretary-General Kofi Annan launched the Global Fund to Fight AIDS, Tuberculosis, and Malaria, and in 2003 US President George W. Bush launched the PEPFAR program. The World Health Organization, led by the Director-General Gro Harlem Brundtland, recruited Kim to lead the WHO’s scale-up effort. Kim did a fantastic job, and his efforts provided the groundwork for bringing ARVs to millions, saving lives, livelihoods, and families.

There are four lessons of that great success. First, the private sector was an important partner, by offering patent-protected drugs at production cost. Drug companies eschewed profits in the poorest countries out of decency and for the sake of their reputations. They recognized that patent rights, if exercised to excess, would be a death warrant for millions of poor people.

Second, the effort was supported by private philanthropy, led by Bill Gates, who inspired others to contribute as well. The Bill & Melinda Gates Foundation backed the new Global Fund, the WHO, and the Commission on Macroeconomics and Health, which I led for the WHO in 2000-2001 (and which successfully campaigned for increased donor funding to fight AIDS and other killer diseases).

Third, the funding to fight AIDS took the form of outright grants, not Wall Street loans.

Fighting AIDS in poor countries was not viewed as a revenue-generating investment needing fancy financial engineering. It was regarded as a vital public good that required philanthropists and high-income countries to fund life-saving treatment for poor and dying people.

Fourth, trained public health specialists led the entire effort, with Kim and Farmer serving as models of professionalism and rectitude. The Global Fund does not stuff the pockets of corrupt ministers, or trade funding for oil concessions or arms deals. The Global Fund applies rigorous, technical standards of public health, and holds recipient countries accountable – including through transparency and co-financing requirements – for delivering services.

The World Bank needs to return to its mission. The SDGs call for, among other things, ending extreme poverty and hunger, instituting universal health coverage, and universal primary and upper secondary education by 2030. But, despite making only slow progress toward these goals, the Bank shows no alarm or strategy to help get the SDGs on track for 2030. On the contrary, rather than embrace the SDGs, the Bank is practically mute, and its officials have even been heard to mutter negatively about them in the corridors of power.

Perhaps US President Donald Trump doesn’t want to hear about his government’s responsibilities vis-à-vis the SDGs. But it is Kim’s job to remind him and the US Congress of those obligations – and that it was a Republican president, George W. Bush who creatively and successfully pursued the battle against AIDS.

Wall Street may help to structure the financing of large-scale renewable energy projects, public transport, highways, and other infrastructure that can pay its way with tolls and user fees. A World Bank-Wall Street partnership could help to ensure that such projects are environmentally sound and fair to the affected communities. That would be all for the good.

Yet such projects, designed for profit or at least direct cost recovery, are not even remotely sufficient to end extreme poverty. Poor countries need grants, not loans, for basic needs like health and education. Kim should draw on his experience as the global health champion who successfully battled against AIDS, rather than embracing an approach that would only bury poor countries in debt. We need the World Bank’s voice and strenuous efforts to mobilize grant financing for the SDGs.

Health care for the poor requires systematic training and deployment of community health workers, diagnostics, medicines, and information systems. Education for the poor requires trained teachers, safe and modern classrooms, and connectivity to other schools and to online curricula. These SDGs can be achieved, but only if there is a clear strategy, grant financing, and clear delivery mechanisms. The World Bank should develop the expertise to help donors and recipient governments make these programs work. Kim knows just how to do this, from his own experience.

Trump and other world leaders are personally accountable for the SDGs. They need to do vastly more. So, too, do the world’s super-rich, whose degree of wealth is historically unprecedented. The super-rich have received round after round of tax cuts and special tax breaks, easy credits from central banks, and exceptional gains from technologies that are boosting profits while lowering unskilled workers’ wages. Even with stock markets’ recent softness, the world’s 2000+ billionaires have around $10 trillion in wealth – enough to fund fully the incremental effort needed to end extreme poverty, if the governments also do their part.

When going to Wall Street, or Davos, or other centers of wealth, the World Bank should inspire the billionaires to put their surging wealth into personal philanthropy to support the SDGs. Bill Gates is doing this, with historic results, for public health. Which billionaires will champion the SDGs for education, renewable energy, fresh water and sanitation, and sustainable agriculture?

With a clear SDG plan, the World Bank would find partners to help it fulfill its core, historic, and vital misión.

Jeffrey D. Sachs, Professor of Sustainable Development and Professor of Health Policy and Management at Columbia University, is Director of Columbia’s Center for Sustainable Development and of the UN Sustainable Development Solutions Network. His books include The End of Poverty, Common Wealth, The Age of Sustainable Development, and, most recently, Building the New American Economy.

A Short History of the Islamic State

By George Friedman and Jacob L. Shapiro

In June 2014, a man named Abu Bakr al-Baghdadi, dressed entirely in black, stood at the pulpit in the Great Mosque of al-Nuri in the Iraqi city of Mosul. The mosque he chose was deliberate: It was built in the 12th century by a Turkic ruler famous for fighting Christian crusaders. The name he chose was deliberate: It was a nod to Abu Bakr, the first caliph, or religious and civil leader of the Muslim world. The garb he chose was deliberate: It harkened back to the caliphs of yore and thus to the Prophet Muhammad himself. The words he chose were deliberate: Failure to re-establish the caliphate, he said, was nothing less than apostasy.

And so it was, with reverence and humility, that this shadowy figure, having declared an end to Islam’s humiliation and disgrace, resurrected an Islamic state, known now as the Islamic State. In al-Baghdadi’s own words, the “sun of jihad” had risen again.

The Islamic State can be traced back to a single individual, a Jordanian man known to history as Abu Musab al-Zarqawi, who became radicalized sometime in the mid-1980s. After a few unsuccessful attempts to wage jihad abroad and a stint in a Jordanian prison, al-Zarqawi hooked up with Osama bin Laden in Afghanistan. The two men would have a tenuous relationship, even after al-Zarqawi formed al-Qaida in Iraq (AQI) to fight the United States in 2004. His tactics became too brutal even for bin Laden.

When al-Zarqawi was killed in 2006, a man named Abu Ayyub al-Masri took his place. AQI was still alive, but only just. Sunni Iraqis who had initially embraced AQI chafed under its brutality. Wise to the growing hostility, al-Masri changed the group’s name twice, first to Majlis Shura al-Mujahidin, a purported Iraqi jihadist coalition, and when that collapsed after a few months, to the Islamic State of Iraq.

The cosmetic changes didn’t work. By September 2006, ISI had so angered the Iraqi Sunni population that 30 Sunni tribes joined forces to defeat them. This was known as the Anbar Awakening, a loose tribal alliance backed by the United States that sought to expel ISI from Iraq.

For the next five years, ISI barely avoided destruction. It lost contact with the core al-Qaida organization. It was weak and isolated.
Taking Advantage of Chaos

Such was the organization Abu Bakr al-Baghdadi inherited when he rose to power in April 2010. His primary goal was for the group to survive. But the troubled political environment of the Middle East enabled him to not only survive but to thrive. The Sunnis were denied a chance to form a governing coalition despite winning more seats than any other party in that year’s parliamentary elections. Iraq was frothing with sectarian violence. Meanwhile, the first demonstration in what would later come to be known as the Arab Spring took place in Tunisia and quickly spread to Iraq and Syria, where an all-out civil war eventually broke out.

Source: Geopolitical Futures

ISI relocated to Syria to take advantage of the chaos, renaming itself the Islamic State of Iraq and al-Sham, or ISIS. It entered a power struggle (which it would eventually win) with al-Qaida’s Syria franchise, Jabhat al-Nusra. While ISIS was getting settled in Syria, though, it was busy recuperating in Iraq, where it would soon begin to stage new attacks.

ISIS then did something unexpected: It began to hold territory, first in the border area with Syria and then the area around Iraq’s third-largest city, Mosul. ISIS famously took the city in just six days, after which al-Baghdadi declared the establishment of a new caliphate and renamed his group the Islamic State.

After al-Baghdadi declared the formation of the caliphate, his group undertook an offensive it had actually been planning for more than a year. IS fighters in Syria fought their way up the Euphrates River, all the way to the Turkish border, and solidified control over the areas south of Raqqa. This created a highly defensible core territory from which IS would not be easily driven.

In Iraq, IS cemented control over a number of Sunni areas on the border with Syria so that it controlled a large swath of the Syrian-Iraqi border. This allowed IS to move fighters and material back and forth across the border at will. And it conquered additional territory around Mosul to strengthen its position there.

Source: Geopolitical Futures (Click to enlarge)

In other words, the Islamic State was in a great position. By September 2014, IS was in control of a territory roughly the size of Great Britain. Various open-source estimates of Islamic State financial resources ranged between $2 billion and $3 billion. And IS controlled oil fields that could bring in an additional $1 million–$2 million daily.

The Islamic State started to resemble an actual state. It levied taxes, managed social services, hired police forces, and established schools. It held territory not for strategic advantage but for direct administration.
Down but Not Out

But the Islamic State’s fall would prove to be as quick as its rise. Savvy though it may have been, it would not have been able to accomplish what it had were it not for the relative indifference of countries such as the United States, Russia, Turkey, and Iran, which had not considered the group much of a threat. But now that IS held real territory, the Islamic State was a real threat to their interests, and soon these larger powers would conspire, if not outright ally, to bring the group down.

The group is down but not out. It has conceded much of its territory, including its capital of Raqqa. But it has not conceded defeat.

That’s not to say IS intends to abandon the territorial gains it has made in Iraq and Syria. It would not have endeavored to claim them if they were unimportant to its goals. But territory is a luxury, not a necessity. The restoration of the caliphate was, in effect, a restoration of Muslim dignity.

All of this hints at what the Islamic State’s next target may be: Saudi Arabia, the steward of Islam’s holiest sites. The country is religious; women must be accompanied by men in public and must cover their faces, and punishments for crimes are derived from Islamic law. But if you’re a fundamentalist, it’s hard not to question Saudi piety. The royals who govern the country live lives of opulence. They drive expensive cars and host debauched parties, rife with alcohol and attended by prostitutes. The Islamic State looks at Saudi Arabia and sees a bunch of hypocrites.

In this hypocrisy the Islamic State sees opportunity. Saudi Arabia is weak and troubled, but more important are the regional dynamics in play. Now that the Islamic State is in retreat, Iran, the de facto leader of the Shiites, is expanding its influence. Saudi Arabia, the de facto leader of the Sunnis, has framed itself as the dam that will stop the rising tide of Iran. The Islamic State has frequently and effectively used sectarian rivalries to its advantage, and there is no bigger sectarian rivalry in the region than the one between Saudi Arabia and Iran.

The Islamic State may be quiet, but there’s no reason to believe it’ll be quiet for long.