Economic Warfare

[slapout9]

Hi Shek, I am not advocating that we return to a gold standard as you say there were certainly problems with it. But I think you are missing the point of a gold standard. A paper note for 5$ could be turned in for 5$ gold coin measured by weight!!! that is why it is a universal standard of value and you buy and sell it by the weight!!! the difference in fiat money(called currency) is reflected by the price (an accounting store of value set by policy...which makes it subject to manipulation) but five ounces of gold is five ounces of gold no matter where you are and that cannot be changed (by man) because it is a physical quantity.

The problem as Keynes pointed out is that is not a very good way to run a modern economy so if you have sound economic policies (tied to physical production of life support) linked with sound monetary policy you can manage large modern economies. But if you have unscrupulous people that manipulate monetary policy mainly divorcing it from physical economic policy you can cause your own country serious problems not to mention use it as a weapon against other countries.

[Fabius Maximus]

For a description of this see "Are We at The Peak of a Minsky Credit Cycle?" by Roubini (July 30, 2007). He explains the 3 stages:

First, sound or “hedge borrowers” who can meet both interest and principal payments out of their own cash flows.
Second, “speculative borrowers” who can only service interest payments out of their cash flows. These speculative borrowers need liquid capital markets that allow them to refinance and roll over their debts as they would not otherwise be able to service the principal of their debts.
Finally, there are “Ponzi borrowers” cannot service neither interest or principal payments. They are called “Ponzi borrowers” as they need persistently increasing prices of the assets they invested in to keep on refinancing their debt obligations.

America delevered from 1929 thru (guessing) the late 1940's. Our re-leveraging proceeded slowly until the great expansion which began in 1982. Since 2000 debt by US households has skyrocketed.

The only ways to delever are inflation, defaults, or economic growth with no new debt (the last is almost impossible in our current economy). The first two work fine, albeit with considerable pain.

In the 1930's we defaulted away our excess debt. For more on the inflationary option see Is the Government deliberately understanding inflation?.

If the US is ending a long Minsky cycle, its resulting economic weakness will probably have large effects on the world geopolitical order. For more on this, read Paul Kennedy's Rise and Fall of the Great Powers (1987).

[Fabius Maximus]

Shek: "Given that, however, it is still not a big fundamental issue."

It's a subject on which I'm not competent to have an opinion, but "a potential regime changing event" is in my opinion the current expert consensus.

Whether it will actually be regime changing is something the big guns in economics and global finance have debated over the last decade, with strong opinions on both sides. Since the result will determined as much by political as economic factors, it is imho unknowable in advance.

As for the post-WWII order, I suspect that few non-experts can explain how the system changed functionally (not conceptually) after the end of BWI. To future generations the shift will be considered trivial imho, perhaps like the differences between the component wars of the Hundred Years War, between Marlborough's various wars, or between WWI and WWII.

On the other hand, I'll bet the end of the US dollar based order (1945 - ????) will be in the history books.

[slapout9]

Hi FM, just started reading Unrestricted Warfare. I am on page 50 and I see why you are recommending it so highly.

[kehenry1]

4GW non-state actors are already committing economic warfare against us and other states. They have been for over a decade. Most of their attacks are formulated on "strategic convergence" that centers around meeting several strategic concerns. Three basic "convergences" include economic, highly public and casualty saturated. Whether that is two attacks on the WTC (1993 and 9/11/2001), the Madrid trains (full of commuters on their way to work), the London Bombings (full of commuters on their way to work), Bali night clubs (tourism), Sharm El Sheikh (tourism), Moroccan Synagogue (tourism), Saudi Arabian oil refinery, Oil pipelines in Iraq, blowing up markets in Iraq, kidnapping people from businesses, taking over the western Anbar smuggling crime rings (one of the reasons the Anbar tribes were getting ticked off; they were interfering with their hereditary business that had sustained them even through Saddam's reign), Piracy of the coast of Somali (interdicting shipping through the suez) and on and on and on.

One of my previous posts from two years ago was about Al Qaida's War for Oil and other things:

This is a map of the Ottoman Empire (caliphate)[see link for maps] at the height of its power from the 15th to early 18th century. It's power was not derived simply by military might. As you can see by the map to the left of the legendary "silk road", it controlled major maritime and land routes, vast amounts of raw resources including base metals, precious metals, precious and semi-precious gems, grain, rice, cotton or muslin, ink, silk, precious woods, papyrus (for making paper), tea and even part of the opium trade (just to name a few). The wealth of the empire helped to produce some of the major changes in medicine, engineering, literature, basic science and philosophy. All this long before the discovery of petroleum.[snip]

Today, Islamist organizations are attempting to regain power in many of these states. And, just like centuries past, these states sit on top of some of the world's largest natural resources and straddles the world's busiest maritime routes. The map on the right shows modern maritime routes that follow the same path as the "silk road" routes with the exception that the Suez Canal has greatly reduced the number of days that it takes to bring products and energy resources to Europe, Russia, Australia, Japan, China and the United States to name a few.

The long term goals of this movement is known. They seek to create an Islamic Caliphate or state that would encompass the original area of the caliphate at the height of its power. They seek to accomplish this goal by supporting Islamist movements through out these areas with the intent of creating slow (or quick) erosion and take over of the most vulnerable states. Even if all of the states within the area do not "flip" to Islamism, the creation of Islamic states in key areas would drastically change the control of key materials, production and maritime routes. If these Islamic states make economic and security compacts with one another, it would formulate the seeds of a wider "caliphate" and potentially dominate neighboring states, not to mention create whole new paradigms for inter-state and international conflict. Any and all movements in this direction could and would be used to damage or control world economics, specifically western economics.[snip]

In the short term, reviewing the contested areas, maritime routes, materials and production, the strategy to "vex and exhaust" the United States, its allies and other target states, does not require the actual take over of any one state and does include a wider economic strategy beyond "military" or "political" cost. Generally, these movements only require that the area or country stays in turmoil, thus increasing the cost of production, exporting, importing and transporting goods as well as securing ports. For instance, 18 of 20 highest volume container ports are in South East Asia. Basically, the strategy of "a thousand cuts".

Check the link for much more including a list of over ten basic resources like steel, cotton, rubber, grains, rice and a multitude of technology that is transported through these routes or come from nations within the scope of the hoped for "caliphate". I address the Suez Canal later in the piece. Sharm El Sheikh in the Sinai could have equally been a destabilizing attack to try to provide room for operations or just cause enough insecurity to have nations shipping things through a much longer (additional ten days) around South Africa. In a JIT (just in time inventory) world, 10 days is a life time. The costs of shipping would be increased by higher insurance rates and much higher diesel fuel utilization, thus higher costs. Along with rising oil prices, this could be extremely detrimental to the world economy.

This is 4GW Economic Warfare at its base. Additional thoughts on North Africa and the "levant" here

Attacks on stock markets can occur by non-state actors with ease. A number of huge trades on the stock market just prior to the 9/11 attacks were traced back to front companies with ties to Islamic terrorist organizations. Whether these trades were simply meant to remove money from a possible crashing market post attacks and preserve funds for operations or the trades were meant to destabilize the market is a good question. Either way, it's non-state actors practicing economic war at the individual or micro-level.

It can be devastating if we let it.

[Fabius Maximus]

Also, thanks for the link to your other work. This is one of the clearest explanations of the threat that I've seen.

Question: do you have any references or links about pre-9/11 trading by probably terrorists? I've heard the rumors. There were investigations, but I recall (just from memory) that their official reports denied this theory.

[bourbon]

Question: do you have any references or links about pre-9/11 trading by probably terrorists? I've heard the rumors. There were investigations, but I recall (just from memory) that their official reports denied this theory.

Poteshman, Allen M., 2006, Unusual Option Market Activity and the Terrorist Attacks of September 11, 2001, Journal of Business 79, 1703-1726. (PDF)

Abstract:
After the terrorist attacks of September 11, 2001 there was a great deal of speculation that the terrorists or their associates had traded in the option market on advanced knowledge of the impending events. It is nearly impossible, however, to assess the option market trading leading up to this or any other event in the absence of systematic information about the characteristics of option market activity. This paper provides this information by computing the distributions of option market volume statistics both unconditionally and when conditioning on the overall level of option activity, the return and trading volume on the underlying stocks, and the return on the overall market. When the option market activity in the days leading up to the terrorist attacks is compared to the benchmark distributions, volume ratio statistics are seen to be at typical levels. An indicator of long put volume, however, appears to be unusually high which is consistent with informed investors having traded in the option market in advance of the attacks.

The insider trading case of Amr "Tony" Elgindy is also interesting.