Economic Warfare

[Fabius Maximus]

It's a hot topic by email among some working with military theory, and I've exchanged many dozen notes on the subject. I think this is the very edge of new thinking about war/conflict. But it seems to have a small audience.

As I said on my blognote yesterday: A brief note on the US Dollar. Is this like August 1914?
"In an age of nukes & 4GW, conventional war between major powers is unlikely — perhaps obsolete. But political stresses remain a fact of life and must be expressed. Perhaps money has replaced bullets as the new form of combat. WWII was as much a war between competing economies as between armies. Modern financial systems allow us to eliminate bombs as the intermediate step, for pure economic warfare."

The first and perhaps most important work in this area was Unrestricted Warfare (1999), written by two PLA Air Force Colonels. They say, in effect, the first war of the new era was the attack by speculators on the SE Asian currencies. This damaged their economies for several years; many of their people were eating bark. If these hedge funds and other traders were based in, for example, Singapore they would have been politely invited to stop. Now. If they declined, the next measures taken would have been less pleasant.

But they were based in New York and London, attacking behind the shield of western military power. Notice has been taken.

Tom Clancey's Debt of Honor describes commercial aircraft being flown as weapons into buildings. Fiction then, fact now. Will the earlier events in that book -- a geopolitical attack on US stocks and the US dollar -- also become fact?

[selil]

The economy of the world has moved from soley industrial to information based. I've been thinking that fourth generation warfare is about information and not insurgency. Cyber infrastructures and economics are intrinsically linked. Need proof look up the Chicago Board of Trade Outage and some the costs that may have initiated. By the way that was a Y2K outage for those who didn't know. I'm no economic scholar but I remember the Dot Bomb and that was based on what? An idea? Well funded companies? I've read articles in the same paper saying dollar diving bad, and dollar diving good. The United States doesn't have the vast manufacturing that would seem to be tied to a diving dollar and benefitting. One interesting tidbit is that this devaluation will make the United States more competitive in closed economies and protectionist environments. But, who gets rich with that?

At to Tom Clancy and his discussion of an attack on the dollar isnt' that based on stuff that happened in the 70's repackaged?

[Fabius Maximus]

At to Tom Clancy and his discussion of an attack on the dollar isnt' that based on stuff that happened in the 70's repackaged?

Great point! The 1970's saw the forequakes of global peak oil production; the real thing will likely occur sometime in the next 20 years (today, perhaps). The 1970's saw the first great US dollar crisis, foreshadowing the real thing which lies in our future (today, perhaps).

The 1970's were a difficult decade for America. And the next few years...

The geopolitical implications of this could be immense. The great emerging powers will certainly take advantage of any weaknesses in America's power.

[Shek]

Great point! The 1970's saw the forequakes of global peak oil production; the real thing will likely occur sometime in the next 20 years (today, perhaps). The 1970's saw the first great US dollar crisis, foreshadowing the real thing which lies in our future (today, perhaps).

The 1970's were a difficult decade for America. And the next few years...

The geopolitical implications of this could be immense. The great emerging powers will certainly take advantage of any weaknesses in America's power.

Peak oil is a doomsayer's tool. As the price of oil increases and settles at a higher level, the profitability of extracting oil from non-low hanging fruit reservoirs will arrive. While the absolute amount of oil will decrease, the relative amount will continue to increase. As the price goes higher and higher, it will also provide the profit incentive for more serious research on alternatives (and better alternatives than the fallacy of ethanol, which has served to drive up food prices and beer prices ).

Also, let us not forget that some of the pain of the 70s was due to poor fiscal policy choices in the 60s coupled with the fallacy of price controls and a weak Fed response. In some sense, years of inflationary policy along with supply shocks created a perfect storm, and ship captains bungled the response. While there may be some parallels to a "perfect storm" scenario now, you have a Fed that is much wiser as well as much more credible, so I'd be careful in drawing too much off of the experiences in the 70s. Besides, you can look at the rapid rise of the price of oil in the past few years, we have already allowed an oil "shock" to transmit through the economy without seeing the same adverse effects of the 70s.

[Fabius Maximus]

Peak oil is a doomsayer's tool. ... Also, let us not forget that some of the pain of the 70s was due to poor fiscal policy choices in the 60s coupled with the fallacy of price controls and a weak Fed response.

I am not aware of any major energy-related institution that says global oil production will not peak. It's like death, the question is when. Due to lack of knowledge about reserves in the Middle East and Former Soviet Union, there is a wide range of estimates -- from now thru 30+ years, clustering in the 15 year range. Since a crash adaptation program will take roughly 20 years, we're already on the clock. The major agencies -- us DOE and the International Energy Agency -- have been clear on this challenge, esp this year. I recommend reading the IEA's World Energy Outlook 2007 (here's the free Executive Summary)

Which is why the 1970's period tells us so much. As Shek notes, some nations adopted wise policies and did quite well -- global growth was strong for the full decade -- while some (e.g., the US) acted foolishly and suffered.

For more on this see my blognotes:
What's needed to adapt to Peak Oil - part I
Peak Oil - part II

[Global Scout]

With crude oil prices nearing $100 a barrel, there is no end in sight to the redistribution of more than 1 percent of the world's gross domestic product. Earlier oil shocks generated giant shifts in wealth and pools of petrodollars, but they eventually faded and economies adjusted. This new high point in petroleum prices has arrived over four years, and many believe it will represent a new plateau even if prices drop back somewhat in coming months.

"There's never been anything like this on a sustained basis the way we've seen the last couple of years," said Kenneth Rogoff, a Harvard University economics professor and former chief economist at the International Monetary Fund. Oil prices "are not spiking; they're just rising," he added.

http://www.msnbc.msn.com/id/21718926/

By way of introduction, this first post may appear to have a liberal slant to some, but only if you view our national security issues from a political party perspective, where the facts are too often confused with agendas. I have always been an independent with a slight lean to the right, but in the end equally despise both parties and pray for a viable third party.

The enclosed article has little to do with economic warfare directly, but everything to do with your facts and assumptions if you’re a strategic planner looking at future threats to our national security, and as we all know there are other than military threats. Any political party in office would attempt to deny that we are experiencing an energy crisis on their watch, so you’ll start seeing so called experts come out of the woodwork saying there is no such thing as peak oil, or increased demand, and that our infrastructure if sufficient, etc., which is another case of facts being confused with agendas. However, the government is taking steps behind the scenes to address these very real problems.

Our national level instruments for waging war, shaping behavior, however we want to phrase it are diplomatic, information, military and economic (DIME). Unfortunately, all of these instruments have been weakened since our invasion of Iraq. We can overcome this setback with a strong economy, because the bottom line is that money is still king and enables all the other instruments, and our adversaries know this, so it only makes sense that they would wage economic warfare against us to weaken our center of gravity, which is our economy.

We’re definitely vulnerable now with our national debt, foreign investment keeping us afloat, an increased demand for energy resources worldwide, and to top it off our excessive credit based economy is starting to bite us in the butt with the real estate correction and its second order effects. Add to that the costs of the long war, Hurricane Katrina, and the other disasters that are normal drains on any nation and you can see the challenge. It isn’t a disaster if we develop appropriate responses and fiscal policies, but if an adversary wants to influence our economy now with a few hostile acts (informational, military, terrorist, economic policy, etc.) it very well could be, and the way to address it isn’t by being in a state of denial.

[Global Scout]

Fabius: Excellent post on empowered individuals, I remember when the Asians were blaming on international investor for the fairly recent economic down turn in Asia. Very few investors are putting their money into the U.S. now, I even recently read that they preferred Egypt of all places for "safe" investments!

Kehenry 1: I second slapout's comments, you couldn't have phrased it better, we are dropping bombs on our own position.

What's nice about a democracy and free press is we can educate the people and throw the rascals out and create new polices.

[Fabius Maximus]

China is following the trajectory of by W Germany, Japan and the SE Asian Tigers. Overlaying the growth charts shows that China is at an early stage in the process. It's easy to forget how long China's predecessors sustained their rapid growth rates. And China is much larger.

Ian Flemming wrote Dr No in 1955. In the opening Bond was musing about a fellow 00 agent sent to Singapore, feeling happy it was not him. In 1955 James Bond was afraid to visit Singapore. Look at it now.

China is still in the export-driven growth stage. Despite its rapid export growth, its share of global exports is slightly less than Japan (both roughly 9%). Of course, China is potentially a much larger economy than Japan. The next stage is rapid growth driven by domestic demand; given China's incredible high savings rate, that phase could also be long and powerful.

As for dependence on the US, only 20% of Chine's merchandise exports go to US. Our share of their total exports is even lower (they export other things, like coal). To whom are their exports growing fastest? The EU.

China will participate in any global downturn, but its fate is not linked to the US. But is the reverse true? They hold almost $2 trillion in US IOU's (including Hong Kong and Macao), and we borrow tens of billions more every month.

America seems to have forgotten that creditors make the rules, not debtors. Creditors are masters of their fate, not debtors.

China's US dollar holdings are assets in the same sense as bullets, valuable only in what they can do. They can use them to exert pressure on the US or to buy our tangible assets. And they will use them at some point.

The fall of the US dollar, as your read this breaking through long-term lows, is potentially a historical event -- the end of the post-WWII global financial order. None can say how it will play out, or what lies on the other side.

[Shek]

The fall of the US dollar, as your read this breaking through long-term lows, is potentially a historical event -- the end of the post-WWII global financial order. None can say how it will play out, or what lies on the other side.

A little bit of hyperbole. The post-WWII global financial order based on Bretton Woods was ended back in 1972. The question is whether the implicit "Bretton Woods II" that emerged over the past decade will remain in effect or disintegrate. The fall of the US dollar is a market reaction to the global imbalances that have been created by the lack of saving in the US, and it is not a bad thing. It is better to see the correction take place in the form of bits and pieces as opposed to a sudden change.