Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: the ransomware group behind the Colonial pipeline shutdown, Druckenmiller’s warning to the Fed, a banker bets big on Doge, and David Bahnsen’s conversation with Larry Kudlow. To sign up for the Capital Note, follow this link. Extortion as a Service If the $70 billion run-up in Dogecoin that preceded Elon Musk’s Saturday Night Live appearance didn’t convince you we live in a simulation, perhaps this might. It’s an official statement released by the hacker syndicate DarkSide, which shut down the U.S. East Coast’s major gas pipeline last weekend: We are apolitical, we do not participate in geopolitics, do not need to tie us with a defined goverment [sic] and look for other our motive [sic]. Our goal is to make money, and not creating [sic] problems for society. From today we introduce moderation and check each company that our partners want to encrypt to avoid social consequences in the future. Typos aside, the statement reads like something out of a multibillion-dollar tech company responding to a Cambridge Analytica–style PR crisis. Silicon Valley entrepreneurs used to call themselves “hackers,” embracing the cypherpunk culture of the early Internet; now it’s hackers aping stakeholder capitalists. I mean, DarkSide literally calls its operations “Ransomware-as-a-Service” (RaaS for short), perhaps hoping the tech jargon will increase its valuation. Here’s the group’s initial release statement: We are a new product on the market, but that does not mean that we have no experience and we came from nowhere. We received millions of dollars profit by partnering with other well-known cryptolockers. We created DarkSide because we didn’t find the perfect product for us. Now we have it. “We didn’t find the perfect product for us. Now we have it.” I’ve heard that in at least three Ted Talks. This is a disruptive extortion racket. DarkSide focuses on “big game” attacks that yield maximal revenue from businesses that can afford to take the hit. The group claims to perform careful financial analysis to “determine how much you can pay based on your net income.” “We do not want to kill your business,” says DarkSide. That’s nice. The RaaS company also boasts best-in-class customer service: “You can ask all your questions in the chat before paying and our support will answer them.” DarkSide doesn’t limit itself to for-profit pursuits. In October 2020, the group announced a $20,000 donation to Children International and The Water Project, two U.S.-based charities. The organizations promptly said that they’d return the money, although I’m not quite sure how, given it came in the form of untraceable Bitcoin. The next month, DarkSide announced the creation of a “sustainable” datacenter in Iran. That, too, didn’t go as planned. Ransomware-recovery firms, which help companies respond to hacks, had to halt any payments to DarkSide for fear of funding a state sponsor of terror. The CEO of Coveware, one such “incident response” company, told Bleeping Computer: “It is probable that a portion of the proceeds from any prospective ransom payment to DarkSide would be used to pay services providers within Iran. Accordingly, we have placed DarkSide on our restricted list.” Ever the lean start-up, DarkSide pulled out of Iran. For a socially responsible cybertheft syndicate, a gas pipeline seems like a decent target. DarkSide could spin it as a forced divestiture of fossil-fuel assets. Unfortunately, the 5,500-mile pipeline delivers some 2.5 million barrels of gas to American drivers daily, and the closure has left gas stations across the Southeast unable to access inventory. While the pipeline will likely resume operations at the end of the week, the high-profile attack caught the attention of the White House, with President Biden saying the U.S. would “disrupt and prosecute” DarkSide. Preventative measure from businesses are the most effective way to combat these kinds of attacks, but I wouldn’t be surprised if law enforcement pegged its efforts on cryptocurrencies, which facilitate payments to ransomware gangs. Alas, Musk’s SNL appearance may have coincided with the beginning of a bad stretch for Bitcoin. Around the Web Stanley Druckenmiller warns against excessive monetary accommodation in the Wall Street Journal With its narrow focus on inflation expectations, the Fed seems to be fighting the last battle. Just because the Fed hasn’t faced big trade-offs in recent decades doesn’t mean trade-offs aren’t coming or that they no longer exist. Chairman Jerome Powell needs to recognize the likelihood of future political pressures on the Fed and stop enabling fiscal and market excesses. The long-term risks from asset bubbles and fiscal dominance dwarf the short-term risk of putting the brakes on a booming economy in 2022. Goldman Sachs MD quits after making a fortune on Dogecoin Sources say that Aziz McMahon, a managing director and head of emerging market sales at Goldman Sachs in London, has resigned, allegedly after making money on Dogecoin the cryptocurrency championed by Elon Musk whose value rose 72 times between the start of January and late last week. Cathie Wood’s ARK Innovation ETF clobbered by tech sell-off Cathie Wood’s Ark Innovation ETF looked set for another difficult day on Tuesday as it extended losses in early trading after suffering its worst drop in seven weeks. The ARKK exchange-traded fund fell 2.9% as of 5:38 a.m. in New York. The product, which makes concentrated bets on tech companies aiming to disrupt industries, plunged 5.2% on Monday to a six-month low with all but five of its 58 holdings retreating in a broad tech selloff. That was double the loss of the Nasdaq 100 Index, and took ARKK’s decline from a February peak to 34%. Random Walk David Bahnsen, a private-wealth manager and longtime friend of National Review, recently launched the Capitol Record podcast. His guests thus far have included Kevin Hassett, Anthony Scaramucci, George Gilder, and Art Laffer. In the most recent episode, David talked to Larry Kudlow. You should listen to the episode in full, but here are some highlights. On Biden’s tax proposals: Kudlow: Cap gains is not only the principal risk-premium tax, it’s a double tax on corporate profits. What you’ve got is a three-way here: a hike in the corporate-profit tax proposed, from 21 to 28, a huge increase in the tax on global cash from 10.5 to 21 . . . and then the capital-gains increase. If it goes through, it would be a big deterrent to investment, and investment drives the economy, not consumer spending. Bahnsen: History’s clear on that. We have both a positive and negative historical precedent. We have economic growth and receipts at the Treasury going higher when Reagan, Kennedy, and Clinton cut capital-gains taxes. And we have the precedent, which is largely undisputed even by far-left economists, that there’s a Laffer curve moment when you get less revenue from a higher capital-gains rate. On long-term economic headwinds: Bahnsen: Apart from the tax side, does the economy have the juice to extend this recovery to get back to 3 percent real GDP growth? Kudlow: There are two things that trouble me beside tax policy. One is the Green New Deal. If this stuff goes through, it’s going to have a very detrimental effect on the economy. In the next five to ten years, you are not going to transform the economy to electric cars and renewables. . . . If you get a penalty structure for carbon and fossil fuels, you are going to shut down a lot of businesses, and the price of power will skyrocket. The other is the social policy. If we’re creating incentives not to work, and saying welfare will be provided more generously without any work requirements, then you’re going to decrease the employment-to-population ratio. It’s very demoralizing; work is a virtue. . . . If you start to erode that, you’re in trouble. — D.T. To sign up for the Capital Note, follow this link.