Them's Fighting Words

As the war of public words between the US and China escalates, the old adage- When you owe the bank $1Mil, you owe the bank.  When you owe the bank $10Bil, they owe you - springs to mind, with a nasty twist. Chillingly, both parties are nuclear armed with significant standing armies.

Following S&P's downgrade of US debt China's Xinhua news offers the following wise economic advice:

China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's dollar assets.

To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.

S&P has already indicated that more credit downgrades may still follow. Thus, if no substantial cuts were made to the U.S. gigantic military expenditure and bloated social welfare costs, the downgrade would prove to be only a prelude to more devastating credit rating cuts, which will further roil the global financial markets all along the way.

Alas, sometimes economic wisdom clashes with political reality.  Chinese calls for US military expenditure cuts will prick US hawks' ears the wrong way.  I can hear them now- this has been China's goal all along.

I fear the world just took a step closer to the abyss of war.

An Interesting Read on US Involvement in Libya

The Libyan War, American Power and the Decline of the Petrodollar System

Being a lazy man, I'm always pleased to discover someone else has done the heavy lifting of ideas I should have fleshed out in my own arguments.  The article linked above provides context- and as Peter Dale Scott is both a better scholar and writer than I, in much better form- to the views in my post on Osama bin Laden. 

Panetta, Petraeus, Osama?

Timing, they say, is everything.

Less than a week ago, Leon Panetta was replaced as CIA Director by Gen. Petraeus, and nominated as Secretary of Defense.

Today, the world learns of Osama bin Laden's death.

What other changes are in the offing?

After Osama

Osama bin Laden, according to CNN, has been killed in a firefight with US forces in Pakistan and his body has been recovered.

Almost a decade ago, bin Laden, in hopes of, according to some reports, inspiring a jihad and bleeding US financial strength, inter alia, directed the attacks on the Twin Towers and Washington D.C.

Now, only his ghost remains.  The jihad he hoped to inspire has thus far been thankfully quashed, but the US has been bleeding financially for that decade.

What next?

Aside from a substantial increase in Prez. Obama's political capital, which might deflect the right wing's attempts to dismantle the welfare state, inter alia, (and thus indirectly shift market sentiment, to wit, increase negative sentiment on US bonds) direct effects on market psychology and prices (and eventually the underlying fundamentals), at first blush, include:

1) A temporary (duration dependent on, inter alia, announced US policy changes in the next few days) resurgence in $ assets, and consequent decline in Gold and Silver. A rise in US debt market prices. A decline in oil prices.

2) Increased speculation on oversea troop levels in Afghanistan- will they be brought home, will they be redeployed, will they remain the same?

3) Will the Islamic world, in the event troops remain in Afghanistan or are redeployed either in Iraq or Libya, come to the view that US peacemaking after Osama is colonialism in disguise?

4) Medium term, a status quo military presence in the Islamic world, with a significant cause célèbre removed, will not only continue to negatively impact the US budget, it may also increase Islamic resistance (thus further increasing the price of military action), and reduce foreign willingness to finance what may seem more like colonialism than peacekeeping.

The ball is in the Obama administration's court.  Like 9/11, this is a key pivot point.

Much has changed in the US over the past 10 years.  Will this opportunity to change course be grasped, as a similar opportunity was grasped in the aftermath of 9/11?  Will the story simply fade from media consciousness in a few days- signaling an opportunity squandered (or deftly avoided depending on perspective)? What, if any, will the new course be?

From a financial perspective, this seems to me a wonderful opportunity to begin to significantly reduce military expenditure without losing face at home.   US military adventures abroad since 9/11 brought forward the US budget's "day of reckoning" by many years.  Either the US buys some time by reducing such expenditure or the financial day of reckoning will continue to creep forward. 

Without the goal of bin Laden's capture as cloak of respectability, assuming military deployments continue unchanged, the financial day of reckoning might leap instead of creep forward as foreign demand for US debt and willingness to sell oil "cheaply" dries up further.

Ten years ago the world went to war.

What next?

Full Disclosure: Long Gold

Do We Need Another World War?

Ask the average guy on the street if we need another world war and he might respond with, “We need another world war like I need a hole in the head.”   Yet, there are medical conditions which can be solved by holes in the head, such as cranial swelling, i.e. when your brain gets too big for your skull.

War, according to Carl von Clausewitz, is merely the continuation of politics by other means.  In other words, when talking fails to resolve an issue in need of resolution, military force will accomplish what persuasion couldn’t.

However, winning a war, which, in Clausewitz’ view, means achieving political goals via military means, is easier said than done.  As Machiavelli warned, It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things. Because the innovator has for enemies all those who have done well under the old conditions, and lukewarm defenders in those who may do well under the new.

The end results of WWII are consistent with Machiavelli’s warning.  Nazi Germany, Japan and Italy started the war to, inter alia, create a new world order and they succeeded, in part.  At war’s end, a new world order was created, with the US on top.

Having proved its dominance on the battlefield (leaving aside, for this essay, the stunning success of the Russians against the Germans), and carrying the big stick in the form of Atomic Weapons, the US could talk softly, solving, for a time, international financial conundrums which had proven intractable within the context of the League of Nations.  From this perspective, the “success” of the UN, IMF and World Bank, in contrast to the “failure” of the League of Nations is more a function of US power exercised through the new international institutions than some new-found commitment to cooperation. 

Of course, US dominance of world politics was due not just to military might but to its substantial Gold holdings, undamaged by war capital infrastructure, domestic commodity resources, and sheer economic size.  It seems to me the more recent failures of international financial institutions is more a function of the US resource depletion, gold reserve and capital infrastructure exports, and rapid economic growth of China and other populous nations, than some new found weakness in those institutions. 

Defendants don’t fear the Judge who imposes sentence but the power of the state behind him. 

The last world war was, in a sense, a schoolyard brawl decisively won, and broadcast globally, by the strongest kid, who happened to have the richest parents.        

I ask the opening question from the above perspective.  Do we need another world war to breathe new life and power into current or new international financial institutions- solving problems currently deemed intractable?

Barring a new enlightened faith in the virtues of international cooperation by top policy makers, and given the pressing need to apportion financial losses accruing from, inter alia, unprofitable international investments, the answer may be yes. 

Fasten your seat belts.