Irregular Challenges and the Emerging Defense Debate

[SteveMetz]

I attended a very interesting "Meeting America's Security Challenges After Iraq" conference at RAND Washington yesterday. This brought together the flower of the DC wonkocracy/punditocracy (plus me). There were 50-60 total participants. It's very likely that a number of future senior OSD people were there. The CJCS and VJCS each spent an hour with us; there were at least four other 4 stars and five or six 3 stars in attendance. So many 2 stars and 1 stars that some of them had to sit in the back of the room with note takers. The vast majority were Air Force with a sprinkling of Marines (and I hesitate to use the words "Marines" and "sprinkle" in the same sentence).

This was sponsored by Project Air Force at RAND and the Center for Naval Analysis. There were a number of great presentations by people like Frank Hoffman, Bruce Hoffman, Andy Krepinevich, etc. Two take aways: 1) there was an amazing panel on the defense budget led by Ken Krieg. It's chilling just how big the gap is between the services' projected future budgets and every realistic projection on likely budgets. Even simply cutting top acquisition programs wouldn't fix this. The most frightening drop off is in R&D. 2) We are going to see mounting debate (probably AFTER the presidential election) as to whether we should sustain a grand strategy focused on "irregular stuff" or move toward what strategists call an "offshore balancing" strategy where we may intervene in failed states with nukes or oil, but we don't hang around to try and re-engineer them.

Of course, this effort is led to some extent by the Navy, but more by the Air Force. I'm an Army guy but I'm also a Republican with libertarian leanings, and I can't say that I find this idea a bad one. It's clear that right now we have a classic and debilitating means/ends mismatch in our strategy. Our strategic objective is stabilizing and re-engineering Islamic states, but we don't have even the military to do that, much less the other government capabilities. A few people like my friend Tom Donnelly are arguing that we need a massive capability increase. I really think that's unlikely and it's much more probable that we'll simply adjust our strategy and get out of the business of re-engineering other nations.

There are interesting political dynamics in this debate. The political right is still largely behind President Bush's strategy which focuses us on irregular challenges. But I'd have to think the China focus of the "off shore balancing" strategy would resonate with some. I'm not getting a sense of where Democrats fall on this. About the only consistent theme I'm hearing there is that we need more emphasis on training/advising, and working with allies. That doesn't address the big question: what do you do if prevention and multilateral approaches fail? Do you intervene unilaterally or near-unilaterally and attempt to re-engineer, or do you contain and cauterize?

Anyhow, I'm sure you'll hear MUCH more on this during the next five years.

Nota bene: that was my first exposure to the Chief and the Vice. I was very impressed. Best top team we've had for a long time in my estimation.

Other nota bene: leaving a motorpool car in the Pentagon City parking garage at 0730 does not guarantee you can find it at 1900. There's 45 minutes of my life I'll never get back. I did succeed in setting off the panic alarm in it, but it took me another 15 minutes to figure out what level it was on (while it merrily honked away).

[Global Scout]

We are going to see mounting debate (probably AFTER the presidential election) as to whether we should sustain a grand strategy focused on "irregular stuff" or move toward what strategists call an "offshore balancing" strategy where we may intervene in failed states with nukes or oil, but we don't hang around to try and re-engineer them.

Of course, this effort is led to some extent by the Navy, but more by the Air Force.

The Air Force and Navy are attempting to undermine irregular warfare concepts and instead develop an alternative strategy (Gun boat/ship diplomacy) that is dependent on our high tech Navy and Air Force weapons system? Um, isn't this the strategy that has failed us so many times before? I wonder what belt way bandit industries were pushing this concept? Pardon me, but I smell other agendas than national defense here.

Exactly how are we going to intervene in a failing state with significant oil reserves with Air or Naval power? Let's assume Nigeria finally fails as a state and various tribes are competing for control of the oil fields, so our only military response will be to bomb them? That will secure our interests?

We're seeing something else here, and it isn't honest intellectual discussion.

[SteveMetz]

The Air Force and Navy are attempting to undermine irregular warfare concepts and instead develop an alternative strategy (Gun boat/ship diplomacy) that is dependent on our high tech Navy and Air Force weapons system? Um, isn't this the strategy that has failed us so many times before? I wonder what belt way bandit industries were pushing this concept? Pardon me, but I smell other agendas than national defense here.

Exactly how are we going to intervene in a failing state with significant oil reserves with Air or Naval power? Let's assume Nigeria finally fails as a state and various tribes are competing for control of the oil fields, so our only military response will be to bomb them? That will secure our interests?

We're seeing something else here, and it isn't honest intellectual discussion.

There are several threads of thinking in the idea. First, the idea that internal war would lead to a long term cut off of oil exports is somewhat implausible. Insurgents, a new radical regime etc would be highly motivated to continue petroleum exports since that would be their primary source of the funds they need to reward their followers.

In places like Nigeria (and Saudi Arabia), the petroleum production areas are near the coast or off shore, so the United States isn't going to need to occupy large areas of the country to stabilize it.

Third, if an internal war really did threaten to take a major oil producer off line, it's likely that other nations would contribute to a stabilization effort, so the U.S. wouldn't have to do it alone or nearly alone.

Bottom line is that if we truly want to be able to occupy a Pakistan or Nigeria, we need about four times the ground forces we have now. That's such an unlikely scenario that Congress and the public is not going to be willing to pay the massive costs of funding such a force (and probably instituting a draft to get it).

While my thinking isn't exactly the same as the Air Force's or the Navy's, I develop what I've sketched out here a bit in this paper (http://www.stanleyfoundation.org/publications/pab/Metz_HoffmanPAB07.pdf).

[Bill Moore]

Steve,

I can't open your paper from my work computer, so I'll read it this weekend. I don't disagree with what you're saying, but as Slapout pointed out on another thread we are still left with a void when it comes to a solution. Simply to use an example, let’s assume that an insurgent group does seriously threaten Nigeria's oil production. Most of the facilities are in the coastal region, but it is still a challenge, because it is still a large area to secure (assuming we’re going to do it unilaterally) and the terrain channelizes movement. More importantly the threat is emerging from the population there that is hostile to the oil companies or the governments that they think they represent. In a scenario like this, what exactly are the Navy and AF proposing to secure our interests there?

I think we might have the political will to execute a Roman strategy with the Air Force for a short period of time, but the effects of such an approach would be short lived (it would be punitive in nature, but our objective is to secure our access to the oil), so once again we would have to come back to dealing with the population where the security problems are emerging from, and by the way a population that is now more motivated to hate us after a bombing campaign. I think it is also a safe assumption that we can't commit western security forces to every Nigeria like situation for long durations, so it seems that our only feasible response is a COIN like approach where we develop capable host nation security forces and pacify the population using what you call a British like approach. If that doesn't work, then I think we (the global economy) lose access to that source of oil production. Some wars/conflicts can't be won, at least when we attempt to achieve absolute victory and try to re-engineer countries in our image. We either need to then develop realistic and acceptable national security goals, or we need to withdraw. The beauty of using the British method is we can withdraw combat advisors and trainers with little impact on our national prestige, but we can't withdraw conventional combat forces without serious second order effects (Vietnam, Somalia).

I tire of hearing that the American people don't have the political will to stick with COIN. There are many cases where COIN has been successful throughout our history, because the cost has been relatively low in dollars and blood (Greece, Philippines in the 1950s, El Salvador, etc.). I don't hear the American people clamoring to pull out the Philippines, the Horn of Africa, and numerous other locations where professionals are quietly doing their job. In the few cases where America lost their political will to endure, we employed large conventional forces at great expense (blood and dollars), and pursued the wrong strategy. By the time we got the strategy right such as GEN Abrams did in Vietnam, and now GEN Petraeus in Iraq, the will of the American people was already wore thin.

[SteveMetz]

Steve,

I can't open your paper from my work computer, so I'll read it this weekend. I don't disagree with what you're saying, but as Slapout pointed out on another thread we are still left with a void when it comes to a solution. Simply to use an example, let’s assume that an insurgent group does seriously threaten Nigeria's oil production. Most of the facilities are in the coastal region, but it is still a challenge, because it is still a large area to secure (assuming we’re going to do it unilaterally) and the terrain channelizes movement. More importantly the threat is emerging from the population there that is hostile to the oil companies or the governments that they think they represent. In a scenario like this, what exactly are the Navy and AF proposing to secure our interests there?

I think we might have the political will to execute a Roman strategy with the Air Force for a short period of time, but the effects of such an approach would be short lived (it would be punitive in nature, but our objective is to secure our access to the oil), so once again we would have to come back to dealing with the population where the security problems are emerging from, and by the way a population that is now more motivated to hate us after a bombing campaign. I think it is also a safe assumption that we can't commit western security forces to every Nigeria like situation for long durations, so it seems that our only feasible response is a COIN like approach where we develop capable host nation security forces and pacify the population using what you call a British like approach. If that doesn't work, then I think we (the global economy) lose access to that source of oil production. Some wars/conflicts can't be won, at least when we attempt to achieve absolute victory and try to re-engineer countries in our image. We either need to then develop realistic and acceptable national security goals, or we need to withdraw. The beauty of using the British method is we can withdraw combat advisors and trainers with little impact on our national prestige, but we can't withdraw conventional combat forces without serious second order effects (Vietnam, Somalia).

I tire of hearing that the American people don't have the political will to stick with COIN. There are many cases where COIN has been successful throughout our history, because the cost has been relatively low in dollars and blood (Greece, Philippines in the 1950s, El Salvador, etc.). I don't hear the American people clamoring to pull out the Philippines, the Horn of Africa, and numerous other locations where professionals are quietly doing their job. In the few cases where America lost their political will to endure, we employed large conventional forces at great expense (blood and dollars), and pursued the wrong strategy. By the time we got the strategy right such as GEN Abrams did in Vietnam, and now GEN Petraeus in Iraq, the will of the American people was already wore thin.


What I'm trying to suggest is that securing a vital resource, controlling WMD, or even providing humanitarian relief during an internal crisis does not necessarily imply undertaking sustained counterinsurgency and/or trying to rebuild a failed state. The costs of the former may be worth bearing; I don't think the costs of the latter are.

On your second point, what I suggested in the study is that when there is a functioning government and military that we have enough leverage over to make them undertake serious and sustained reform (e.g. El Salvador), then we should go for it. What I'm opposed to is treating every nation like it is El Salvador. I don't think that's a universal model.

To me, PI is a classic case of a system where the elite derives benefits from keeping a low level insurgency (or, more accurately, multiple insurgencies) percolating along. I was sitting at a meeting last year and asked myself--if the Philippines or Colombia haven't eradicated their insurgencies after fifty years, what makes us think they will in the future? Will we be providing counterinsurgency support in Iraq and Afghanistan in 2057?

[Ken White]

Steve,

I can't open your paper from my work computer, so I'll read it this weekend. I don't disagree with what you're saying, but as Slapout pointed out on another thread we are still left with a void when it comes to a solution...
. . .
I tire of hearing that the American people don't have the political will to stick with COIN. There are many cases where COIN has been successful throughout our history, because the cost has been relatively low in dollars and blood (Greece, Philippines in the 1950s, El Salvador, etc.). I don't hear the American people clamoring to pull out the Philippines, the Horn of Africa, and numerous other locations where professionals are quietly doing their job. In the few cases where America lost their political will to endure, we employed large conventional forces at great expense (blood and dollars), and pursued the wrong strategy. By the time we got the strategy right such as GEN Abrams did in Vietnam, and now GEN Petraeus in Iraq, the will of the American people was already wore thin.

While I very much agree in principle, I offer some thoughts.

Most of the American people will stick with COIN as long as two factors are heeded; the commitment needs to be low with respect to the number of Troops committed; and some success most be attained. The polity does a cost-benefit analysis and as long as the case is honestly made and the public perceives that the ratio is in our favor, the majority will be supportive.

Changes in society have impacted the problem of support; as a collective we are more inclined to reject harshness or excessive force in any vein and we are more impatient in demanding quick results. Failure to acknowledge this can have deleterious effects.

The wrong strategy statement is valid, too valid, Aside from the obvious and well discussed flaws, the inter service rivalries and parochialism that prevailed -- and still do -- have a crtical and adverse impact and that situation must be somehow eliminated. That, IMO, is the job of DoD and they've never addressed it well. Left to their own devices, the services and SOCOM will not reconcile themselves to each other. This is a critical failing, is embedded and Congress is not helpful. It impacts everything from force structure to strategic choices and it needs to die. Unfortunately, human nature mitigates against a solution but such a solution, while difficult, is not unattainable.

We need full spectrum capabilities and balance and we cannot afford to tilt too far toward either COIN or 'big war' -- we've got to be able to do both and do them well. We can do that, easily -- if the will is there.

[davidbfpo]

From over here I'd add a third important factor which will ensure public support for waging COIN - the locals are willing to serve in the security forces.

It is the lack of this in Afghanistan that makes many, let alone those who serve there, question why should we shed blood to defend them? I cite the often reported 20% desertion rate for the Afghan national Army in support.

The deployment of large, professional or conscript forces historically can attract public support (I exclude Vietnam) and I cannot recall any opposition in the UK to the long-running Malaysian campaign. Aden was un-popular here, but the Oman border war a few years later - with mainly Special Forces - hardly had any public attention. France in Algeria and the Portugese in Africa should not be overlooked.

I say this all from an armchair.

davidbfpo

[Ski]

How is any of this afforable when the country is $10T in debt?

[Rank amateur]

How is any of this afforable when the country is $10T in debt?

You've obviously never owned a credit card. ;)

[Ski]

Just a wee bit different.

[Ron Humphrey]

Just a wee bit different.

sure of that?:D

[tequila]

Being the world's reserve currency gives the U.S. the biggest credit card account in the world.

Of course we've been running it up mercilessly in the past 8 years, and the creditors are getting a wee bit nervous, hence the steady and accelerating decline in the value of the USD over the same time period.

[Tacitus]

First, the idea that internal war would lead to a long term cut off of oil exports is somewhat implausible. Insurgents, a new radical regime etc would be highly motivated to continue petroleum exports since that would be their primary source of the funds they need to reward their followers.

Bottom line is that if we truly want to be able to occupy a Pakistan or Nigeria, we need about four times the ground forces we have now. That's such an unlikely scenario that Congress and the public is not going to be willing to pay the massive costs of funding such a force (and probably instituting a draft to get it).

I definitely think we should rethink any idea of sending an army over to a country with significant oil resources, just because there has been a “regime change.” Personally, I’d rather see us spend more toward the development of hydrogen fuel cell vehicles. That is the Holy Grail in achieving true energy independence.
http://en.wikipedia.org/wiki/Fuel_cell_vehicle

Incidentally, Osama Bin Laden has already spoken publicly about his view of the oil resources in the Middle East, and what he would do with them if Islamists seized control of them. In an interview with CNN in March 1997:

Reporter: Mr. Bin Ladin, could you give us your main criticism of the Saudi royal Family that is ruling Saudi Arabia today?

BIN LADIN: Regarding the criticisms of the ruling regime in Saudi Arabia and the Arabian peninsula, the first one is their subordination to the US. So, our main problem is the US government while the Saudi regime is but a branch or an agent of the US.

REPORTER: Mr. Bin Ladin, if the Islamic movement takes over Saudi Arabia, what would your attitude to the West be and will the price of oil be higher?

BIN LADIN: As for oil, it is a commodity that will be subject to the price of the market according to supply and demand. We believe that the current prices are not realistic due to the Saudi regime playing the role of a US agent and the pressures exercised by the US on the Saudi regime to increase production and flooding the market that caused a sharp decrease in oil prices.

http://fl1.findlaw.com/news.findlaw.com/hdocs/docs/binladen/binladenintvw-cnn.pdf

Since then, he has apparently also quipped something along the lines of “Of course, we’d sell it for the best price we could get. I can’t drink it.”

[Tacitus]

Being the world's reserve currency gives the U.S. the biggest credit card account in the world.

Of course we've been running it up mercilessly in the past 8 years, and the creditors are getting a wee bit nervous, hence the steady and accelerating decline in the value of the USD over the same time period.

It is not written in stone anywhere that the US Dollar must be the world reserve currency. It replaced the British Pound. It will be replaced, itself, if current trends are not reversed. THEN, things will get interesting. Some states have already broken the dollar peg.

Presidential candidates are trampling around the cornfields of Iowa, and through the snows of New Hampshire. You might think they would be talking about the credit crunch and subrime loan fiasco, and what has happened to the dollar. But no.

It really boggles my mind why the foreigners continue to lend to the U.S. government on the terms that they do. I know I wouldn't. I'd be on a buyer's strike.

Things are going to get interesting. We already have a president (and a Republican one at that) wanting to rewrite mortgage contracts. I eagerly await the next chapters in this drama as it unfolds.

[SteveMetz]

Presidential candidates are trampling around the cornfields of Iowa, and through the snows of New Hampshire. You might think they would be talking about the credit crunch and subrime loan fiasco, and what has happened to the dollar. But no.

It really boggles my mind why the foreigners continue to lend to the U.S. government on the terms that they do. I know I wouldn't. I'd be on a buyer's strike.



Hear, hear!! Every time I am asked to do a poll of important issues by the RNC or someone else, I put that near the top of my list. I too wish the candidates would grapple with that instead of seeing who can throw the biggest roundhouse punch at the "Islamocfascism" strawman.

[Rank amateur]

It really boggles my mind why the foreigners continue to lend to the U.S. government on the terms that they do.

Supply and demand. They get paid in US dollars. They have billions to invest and we will pay more for them than anyone else. (To convert to Euros, you need to find someone whose selling Euros and wants a billion US dollars in exchange. It can be done, but you end up with less money than if you buy US bonds.)


Just a wee bit different.

If you're President, you can pretend that they're not. If they keep raising your limit, you can keep spending.

[tequila]

It is not written in stone anywhere that the US Dollar must be the world reserve currency. It replaced the British Pound. It will be replaced, itself, if current trends are not reversed. THEN, things will get interesting. Some states have already broken the dollar peg.

Agreed. However it took quite a bit for the pound to fall from grace even after its industrial preeminence had ended. Comprehensive battlefield defeat in Europe, a forced rescue both military and economic by the United States, and the stripping of its colonies --- in other words, the cataclysm that was the 20th century. It will take something at least as total and shattering for the USD to be replaced in most nations' reserves, not least because the world system (both political and economic) is built upon U.S. predominance and few nations are willing to undergo the upheaval that would come if the U.S. fell from that perch, especially with no replacement in sight. The Gulf Cooperation Council, for instance, would be quite smart to divest away from the USD in its holdings, but chose not do so at its most recent meeting despite recommendations on the part of its more intelligent economic advisors. Why? Because the Saudis, who are the 800-lb. gorilla of the GCC, know that to part ways with the USD would constitute a major rupture in its alliance with the U.S. and alienate the GCC's security guarantor. Thus the GCC will glumly watch their dollar holdings fall by billions in value, while inflation skyrockets in their homelands, in return for keeping the U.S. relationship functioning smoothly.


Supply and demand. They get paid in US dollars. They have billions to invest and we will pay more for them than anyone else. (To convert to Euros, you need to find someone whose selling Euros and wants a billion US dollars in exchange. It can be done, but you end up with less money than if you buy US bonds.)


Quite wrong. Investments in the US have returned far less than investments in Asia, especially, for years. U.S. assets have been losers, relatively speaking, for quite awhile. It is the USD's status as the reserve currency and its key role in the world financial system that keeps central banks and investors coming, not because the U.S. is a particularly profitable place to invest.

[Ski]

The economy is sputtering right now. There hasn't been a recession in 20 years - 1987-89 (I know - my dad was unemployed for 2 years). The dollar is getting weaker every day - some countries have turned to the Euro instead. We have billions if not trillions in Treasury Bills owned by the Chinese and Japanese. Energy prices are continuing to rise and won't slow down anytime soon it seems.

And the real ballbuster is the Saudi/Gulf States investment policies in US companies. Want to watch the US economy drain down the ####ter? Pray to God a coup never happens in Saudi Arabia.

[Rank amateur]

Quite wrong. Investments in the US have returned far less than investments in Asia, especially, for years.

China has $1 Trillion in US dollars. (http://www.iht.com/articles/2007/01/09/bloomberg/sxmuk.php)There's only so many lead paint factories you can buy. Saudis are similar. They're making it faster than they can spend it, and invest it outside the US.

[Tacitus]

That is a standard answer to the question of why the foreigners do this. "What else are they gonna do with their money? They just HAVE to buy U.S. bonds. Boy, don't we have them boxed in. He! He! He!" We shall see. It is just economic intertia, the natural coninutation of an unbalanced economic policy until it blows up on somebody.

This state of affairs continues at the moment because of their desire for "stability." Because no dollar crisis has erupted, it is assumed by the government that this can just continue forever. Taking preventative measures would likely cause some pain, and better to shift that onto the next guy who follows along, if it is in fact, needed at all.

Allow me to use an analogy here. Picture a tranquil Alpine setting. All the towns and villages are down in the valley. Snow keeps falling and falling in the mountains in the higher elevations. Alert people down below are nervous about this and warn of a massive avalanche if things continue at this rate. They are scoffed at by the others, "Don't you see it is different this time because (fill in your own explanation)."

And everyone goes about their business. Intrepid weathermen have attempted to climb up higher to measure the snowpack to try to measure how much can be accumulated before the avalanche triggers, but even they admit that this is impossible because there are too many variables and unknowns involved to confidently predict the breaking point.

But from merely looking at historical examples, they know such a point exists, and we are past points where it has occured in recorded history. Down in the valley, it all seems great... except for these annoying, irritating worry-wart weathermen who seem to be crying wolf all the time about the record snowfalls up in the mountains.

Doesn't this end in a dollar crisis? And then the Federal Reserve has to either allow the value of the dollar to crash (further at this point) against foreign currencies and gold, or ratchet up interest rates to very high levels to defend the value of the currency? Pick your poison, so to speak. That's where these sort of circumstances always led in all the economic classes I ever took.

The crazy thing is that we have seen this movie before in the runup to the collapse of the Bretton Woods system. Hello 1970s all over again? I didn't particularly like that decade the first time around. I'll like it even less if we experience a rerun. But is that not where this is headed, ceteris paribus?

[JeffC]

That is a standard answer to the question of why the foreigners do this. "What else are they gonna do with their money? They just HAVE to buy U.S. bonds. Boy, don't we have them boxed in. He! He! He!" We shall see. It is just economic intertia, the natural coninutation of an unbalanced economic policy until it blows up on somebody.

Speak of the devil:

China Says Weak Dollar Is a Bigger Concern Than Yuan (Update3) (http://www.bloomberg.com/apps/news?pid=20601080&sid=agFyy1CEERAg&refer=asia)

By Li Yanping and Zhang Dingmin

Dec. 12 (Bloomberg) -- China, the second-largest foreign holder of U.S. Treasuries, said the declining dollar is a bigger concern for the Chinese economy than the yuan's gains.

``The dollar's depreciation makes major commodities such as gold and oil more expensive, and reduces the wealth of countries and companies that hold dollar assets,'' the acting Chinese commerce minister Chen Deming said today at the Strategic Economic Dialogue outside Beijing. ``The yuan's 6 percent gain this year against the dollar fits China's economic needs.''

[Ron Humphrey]

Speak of the devil:

China Says Weak Dollar Is a Bigger Concern Than Yuan (Update3) (http://www.bloomberg.com/apps/news?pid=20601080&sid=agFyy1CEERAg&refer=asia)

By Li Yanping and Zhang Dingmin

Dec. 12 (Bloomberg) -- China, the second-largest foreign holder of U.S. Treasuries, said the declining dollar is a bigger concern for the Chinese economy than the yuan's gains.

``The dollar's depreciation makes major commodities such as gold and oil more expensive, and reduces the wealth of countries and companies that hold dollar assets,'' the acting Chinese commerce minister Chen Deming said today at the Strategic Economic Dialogue outside Beijing. ``The yuan's 6 percent gain this year against the dollar fits China's economic needs.''

Wonder what that does to their christmas shopping?
How much was an aircraft carrier again?:rolleyes:

[Rank amateur]

That is a standard answer to the question of why the foreigners do this. "What else are they gonna do with their money? They just HAVE to buy U.S. bonds.

No, but they need to find someone willing to accept US dollars. When we were selling fewer bonds, the Saudis bought Manhattan real estate etc. (If no one wants US dollars it hurts them more than us: they have a trillion of them.)

None of which means deficit spending is OK - I don't think I'm allowed to say what I think about Cheney's comment "Reagan proved that deficits don't matter" - it just answers your question of why they loan us money. It's not their money. It's our money: the money we send them for oil, toys painted with lead and other cheap crap made in China.

[JeffC]

No, but they need to find someone willing to accept US dollars. When we were selling fewer bonds, the Saudis bought Manhattan real estate etc. (If no one wants US dollars it hurts them more than us: they have a trillion of them.)

But not belonging to the U.S. That's a foreign currency reserve amount (in $US). China holds about $400 Million from the U.S., and second to Japan, which is a few hundred million higher.



it just answers your question of why they loan us money. It's not their money. It's our money: the money we send them for oil, toys painted with lead and other cheap crap made in China.

That's a vast oversimplification. The U.S. is a key market, and there hasn't been a reason up until recently to worry about the dollar losing value, but between the size of the national debt and the sub-prime mortgage debacle (which has impacted foreign banks as well), the dollar no longer has the allure that it used to have. China can decide to stop buying our bonds, or to switch to the Euro. It might be painful for them, but not nearly as painful as it will be for the U.S. It would be a catastrophe in ways that I can only begin to imagine.

[tequila]

Tacitus - Long-term I absolutely agree with you. The USD's status as the world's reserve currency is as much a foundation of U.S. national power as the U.S. military. We seem to be engaged in pissing both away profligately. However, to say that either one is on the brink of destruction is needless alarmism. What we need are steady hands on the tiller and a period of rebuilding strength. As a nation, we can do this - just hopefully with a memory this time.

[Ski]

Right - there still is plenty of time to reverse course on the economic stupidity that has occured over the last decade. But that means raising taxes to reduce the debt, strengthening the dollar, and cutting federal spending.

[Tacitus]

tequila and ski:I tried to be careful to say that I am not predicting an immenent avalance. I can't pinpoint the timing of a dollar crisis with any more precision than the weathermen in my analogy could predict the super avalance. Nobody can. I've read some commentary by Paul Volcker recently, who seems to share my concerns about this. But economic history is notoriously cruel to those who make predictions.

I'm just saying this is how this story is likely to end, if current policies and practices are not reversed. And I'm not seeing any indications of said reversals. The current absence of an alternative is likely giving us more time than previous countries enjoyed. The Euro is the only obvious candidate, but that currency has its own set of unique problems.

This is the kind of problem that will never resonate with the electorate because they either do not understand it, or recognize the implications. So the politicians are under no pressure to deal with it beforehand. I just don't see the impetus to correct this problem until confronted with the worst. Is it a flaw in democracy? A flaw in education? Beats me.

Consider the words attributed to Sir Alex Fraser Tytler, the 18th century Scottish jurist and historian from "The Decline and Fall of the Athenian Republic", c.1799 :

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess from the public treasury. From that time on the majority always votes for the candidates promising the most benefits from the public treasury, with the results that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.

“The average age of the world's great civilizations has been 200 years. These nations have progressed through this sequence: from bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance; from abundance to selfishness; from selfishness to complacency; from complacency to apathy; from apathy to dependency; from dependency back again to bondage.”

And on that cheeful note, I'll shut up about this intractable problem.

[Rank amateur]

or to switch to the Euro.

They can get more euros by selling more cheap crap to Europe, but if they want to keep doing business with us they need to keep accepting $US.

If they don't want our bonds, we'll need to lower the price - raise the rate of return - which will hurt the economy, but the entire thing won't collapse any time soon. Sooner or later, however, somebody will need to pay for this war.

[slapout9]

I think it was JeffC that said Saudi switched out of US dollars into hard assets, it would not surprise me if China would get all Sun Tzu like and go for a technology swap of some kind in exchange for retiring a large portion of the debt they hold. Let's see:rolleyes: how do you get the plans for an F-22 steal them, buy them, or swap for them;)

[diablocz]

Link below has some interesting conclusions to draw as to why we are not in such dire straits economically... Yes - far off the track of what the thread was supposed to be about...

Cheers -
Diablocz

http://www.stratfor.com/products/premium/gir.php?utm_source=071211-GIR&utm_medium=email-strat-html&utm_content=071211-GIR-header-read&utm_campaign=GIR

[JeffC]

Link below has some interesting conclusions to draw as to why we are not in such dire straits economically... Yes - far off the track of what the thread was supposed to be about...

Cheers -
Diablocz

http://www.stratfor.com/products/premium/gir.php?utm_source=071211-GIR&utm_medium=email-strat-html&utm_content=071211-GIR-header-read&utm_campaign=GIR


Well, I like Stratfor as much as anyone but George is hit and miss on a lot of stuff. One thing, however, is certain. Anytime someone says "Oh, this will NEVER happen (i.e., China and the Middle East are "locked in" to the dollar and will never change), then you should start taking bets on just the opposite happening. It's the "never say never" curse!

[JeffC]

I think it was JeffC that said Saudi switched out of US dollars into hard assets, it would not surprise me if China would get all Sun Tzu like and go for a technology swap of some kind in exchange for retiring a large portion of the debt they hold. Let's see:rolleyes: how do you get the plans for an F-22 steal them, buy them, or swap for them;)

I don't think it was me, but I could be wrong. My memory isn't what it used to be. I'm really not adopting a hard position on this topic, but I think it's foolish optimism to think that neither China nor the Arabic nations will ever dump dollars and therefore we can do as we please in their areas of influence.

It's true that dumping dollars will hurt them, but they'll recover based on the strength of their respective economies. The U.S. would have a much harder time of it.

Of course, all of this would be moot if our leaders adopted a more collaborative position with the rest of the world and quit spending more than we can afford.

[slapout9]

. When we were selling fewer bonds, the Saudis bought Manhattan real estate etc. (If no one wants US dollars it hurts them more than us: they have a trillion of them.)




My bad Jeff it was Rank Am:o

[diablocz]

True enough...never say never. Mr Friedman has been off quite a few times...but what I do think makes sense is his prediction of no rapid, wholesale changes to the current system...too many losers and no clear winners...

[Tacitus]

True enough...never say never.
Remember when Iron Mike Tyson wore the heavyweight crown, was knocking out everybody in sight, and was so fearsome it seemed inconceivable he could lose?

Well, as always happens eventually, he finally met his match. On a night in Tokyo, in a fight nobody even bothered to watch live over here, Buster Douglas beat him, and after that he just kept getting beaten. It was the same Mike Tyson, but Buster had broken a psychological barrier.

http://en.wikipedia.org/wiki/James_Buster_Douglas

Any reality check that pierces the myth that the American economy is "too big to fail" could trigger some nasty consequences. Once those "animal spirits" get out of the cage, they resist re-incarceration.

When discussing this sort of subject, often somebody will comment that it would just not be a rational thing for someone to initiate, and others participate in a chain of events leading to this, since it will harm everyone. Therefore, they won't.

My reading of history does not give me that kind of comfort. WWI just boggles my mind. I'm probably one of the few who still reads books about it. None of it makes any sense to me. From the start of it to the end. Yet, there it is, in the books.

Pick any of the various financial manias (from Dutch Tulips to the South Seas Bubble, to John Law's French schemes, ...tech stocks, SIVs), counting on rationality to bring people to their senses before too late is a thin reed to lean on.. Not that I have any real prescription for this. People just do dumb things when it comes to money and finance sometimes. Occasionally, a whole bunch of people do really dumb things. This might be one for the ages.

[SteveMetz]

Remember when Iron Mike Tyson wore the heavyweight crown, was knocking out everybody in sight, and was so fearsome it seemed inconceivable he could lose?

Well, as always happens eventually, he finally met his match. On a night in Tokyo, in a fight nobody even bothered to watch live over here, Buster Douglas beat him, and after that he just kept getting beaten. It was the same Mike Tyson, but Buster had broken a psychological barrier.

http://en.wikipedia.org/wiki/James_Buster_Douglas

Any reality check that pierces the myth that the American economy is "too big to fail" could trigger some nasty consequences. Once those "animal spirits" get out of the cage, they resist re-incarceration.

When discussing this sort of subject, often somebody will comment that it would just not be a rational thing for someone to initiate, and others participate in a chain of events leading to this, since it will harm everyone. Therefore, they won't.

My reading of history does not give me that kind of comfort. WWI just boggles my mind. I'm probably one of the few who still reads books about it. None of it makes any sense to me. From the start of it to the end. Yet, there it is, in the books.

Pick any of the various financial manias (from Dutch Tulips to the South Seas Bubble, to John Law's French schemes, ...tech stocks, SIVs), counting on rationality to bring people to their senses before too late is a thin reed to lean on.. Not that I have any real prescription for this. People just do dumb things when it comes to money and finance sometimes. Occasionally, a whole bunch of people do really dumb things. This might be one for the ages.

If we run with that metaphor, we can conclude that someday soon, the United States will bite Iran's ear off.

[Ron Humphrey]

If we run with that metaphor, we can conclude that someday soon, the United States will bite Iran's ear off.

It would be just a flesh wound

[Ski]

I hope the ear was cleaned prior to said biting.

[Rank amateur]

We're not in a bubble. It would take a whole bunch of stupid decisions in a row for there to be an economic disaster. Not impossible, but not imminent.

Far more likely is that we don't let any immigrants in the country, Lou Dobb looses his job and the economy slowly shrinks like our population.

A little holiday cheer.

SHANGHAI, China (AP) -- China may be losing its competitive advantage, mainly because of rising costs, according to a survey of companies compiled by the American Chamber of Commerce in Shanghai.

Rampant product piracy was another persistent problem highlighted in a report released Friday that was based on a survey of the group's 1,600 corporate members. (http://money.cnn.com/2007/12/14/news/international/bc.china.us.business.ap/index.htm?postversion=2007121408)