Economic Warfare

[Fabius Maximus]

Is the fall of the US dollar good or bad? Both, neither. It's the wrong question. Is a fever good or bad?

Both are symptoms. The US consumes more than it produces, the difference met by foreign borrowing -- seen in the current account (c/a) deficit. The gap has grown worse since 2000, with the c/a running over 6%.

How bad is that? The saying goes: when they see a nation running a 3% c/a deficit the IMF staff prepare the bailout plan; at 3 1/2% they buy their airplane tickets. We're at 6%, a level seen only before by 3rd world states and (briefly) Ireland and Greece (during their dark days).

It is an ugly combo, a large c/a deficit and large foreign debt. Hence private lenders have largely abandoned us, with the c/a deficit funded by a small number of central banks (loosely defined as State buyers of foreign exchange). Mostly Asians (esp China) and oil exporters (mostly Saudi).

Over the past 5 years this situation has been extensively modeled by academic, ngo, commercial, and government agencies. The consensus is that it is not stable. As the debtor at the center, "rebalancing" will hurt us the most.

As kenenry1 and shek both not, economics is largely about rates of change. If this resolves itself slowly, we can pleasantly adjust. Not so good if done rapidly. As I said on my blog, "currency flight" means nothing to most Americans -- unlike those of nations that have experienced it. We too may have this interesting experience.

Shek, it is not hyperbole to say this is "potentially a regime changing event". Most major experts in the field have said so, in one form or another. The BWII system assumes accellerating debt accumulation in the US, matched with US dollar reserve accumulation by foreign central banks.

That system is ending now. Russia is opting out. The Middle East oil exports are talking about opting out, as pegging their currencies to the USD means rising inflation. And China over the past year has made it increasingly clear that their policies are changing. Cheng Siwei's comments on Nov 8 (vice chairman of the National People’s Congress in China), which hit the dollar hard, we probably another signal of this slow policy change.

In a different way, so are the creation of Soverign Wealth Funds. Instead of t-bills, our creditors want something more useful in exchange for the goods they give us.

[slapout9]

I remember Nixon's comment after leaving BW "We are all Keynesian now" (reference to the UK economist John Maynard Keynes). The separation of the dollar from a gold standard to a "production standard" meaning if your country can expand it's productive capabilities it can expand it's money supply.

If your country adopts a policy of exporting it's "productive capacity" to other countries you will be in deep trouble because your currency will end up being worthless!

If economic warfare is in play I would think a country such as China would have an objective in mind as opposed to just general financial chaos...so what is it??? maybe offer the US a debt swap for high tech military technology....access to patents without any royalties to be paid....advanced oil exploration technologies?? Just thinking out loud.

[Shek]

I remember Nixon's comment after leaving BW "We are all Keynesian now" (reference to the UK economist John Maynard Keynes). The separation of the dollar from a gold standard to a "production standard" meaning if your country can expand it's productive capabilities it can expand it's money supply.

Slap,

A clarification here - the gold standard doesn't refer to a rigid exchange rate between gold and fiat currency. Instead, it refers to the fact that one could trade in their fiat currency in exchange for gold. The exchange rate between gold and the fiat currency isn't fixed, and in fact, it shouldn't be fixed. Otherwise, you'd suffer from deflation and price instability, which is a dampener on economic growth. We only need to look back a little over a century to see how a rigid money supply (at the time, tied to the amount of gold) results in severe boom/bust cycles.

Thus, the idea of the dollar (or any other currency) not being fixed fixed to gold was nothing new at time of the Nixon Administration's decision to pull out of the Bretton Woods framework. Money supply could grow to meet production growth to prevent deflation and price instability - the difference became that you could go turn in your dollars for gold.

[wm]

Originally Posted by Norfolk
It is only logical then that (sadly) many business types have long been devotees of Chinese strategic and military thought (amongst others).

Indeed. And wisely so. Entrepreneurs are the terrorists of the business world. One does well to look carefully at them to see how they rise from one or two guys with an idea into a global juggernaut.

Concur. Microsoft remembers its roots and therefore spends a lot of time and money squashing other IT entrepreneurs. And of course there's Larry Ellison over at Oracle.

[kehenry1]

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)

Actually, the immediate problem is not necessarily "oil peak" in regards to reduced oil deposits for extraction, but the eventual "peak" of extraction and production capabilities. On any given oil field there are only so many points of extraction and so much oil producing infrastructure. It's this in the short term that is being outstripped by demand and will continue so.

Silver lining? Maybe force us to move into other energy resources sooner or risk a severe recession caused by inflated oil prices due to increasing demands.

and, yes, I fear a shift in economic power if we do not have a significant change in trading practices.

One reason why I have been torn on the immigration situation in the US. The only way to keep us viable is to be able to compete in the labor market. We need significant immigration of low skilled workers to re-invent our manufacturing capabilities. We also need to watch artificially increasing wages with minimum wage hikes. We also need to reduce federal spending significantly. We have to be able to survive our own economic war devices.

Right now, I sometimes feel like we are calling the bombs down on top of our position so to speak.

[slapout9]

Right now, I sometimes feel like we are calling the bombs down on top of our position so to speak.

Couldn't agree more. A big reason for this is under the US Constitution Congress has the power to print and coin money........until they gave it away to the Federal Reserve Board which most people don't realize is a PRIVATE Corporation not a government agency.

This one act set the conditions for private players to enter the seen which in the long run can transfer power to private groups or individuals not Governments. If you can control interest rates and loan policy you pretty much can run the show no matter who gets elected.

[Rex Brynen]

Proxy wars - Muslim Brotherhood, PIJ, Hezbollah, the insurgency in Kazakhstan, etcetera, most insurgencies (http://www.tkb.org/Home.jsp) are also proxy wars. (Proxy war meaning they are supported from outside by a nation or a tolerated financial support system for political ends.)

The Muslim Brotherhood is hardly anyone's "proxy warrior."

Cultural warfare - In this area exclusively we excel. MTV, Disney, our movies, to a mild degree our news media. All of that undercuts them. It is one of their motivators, to fight us by indoctrinating their children in madrassas. Their defense is madrassas, and it has worked pretty well.

Madrassas (and I assume by this you mean Islamist madrassas, since the word itself is simply Arabic for "school") are relevant in some areas--and completely irrelevant in others, where education is overwhelming state-run.

I'm not sure how effective Disney or MTV is in undercutting anything. After all, a fondness for video games and sports bars didn't stop the 9/11 hijackers.

support of dissidents and subversion - See what Walid Shoebat, former Palestinian terrorist, has to say about this. ( http://www.shoebat.com/ ) I watched a protest when he spoke, and it required serious security.

Oddly, Shoebat claims:

As a young man, he became a member of the Palestinian Liberation Organization, and participated in acts of terror and violence against Israel, and was later imprisoned in the Russian Compound, Jerusalem's central prison for incitement and violence against Israel.

Actually, the PLO doesn't have "members" --its possible to be an employee (which he wasn't) or a member of a constituent organization (Fateh, PFLP, etc).

The Russian Compound, among other things, houses a police headquarters and an interrogation center. While individuals may be detained there for limited periods, it generally isn't used as a prison for extended detentions.

If I am banned for this post, you will know why, and you will understand that the information/cultural warfare's tentacles extend right into this "Small Wars Journal", where simple discussion of facts not allowed.

They were highly stereotyped non-facts, Brian, which is why Jedburgh called you on them.

However, you may have a point--I've always wondered if he might be a really, really, really deep cover AQ sleeper.

[Fabius Maximus]

I don't know the protocol of this, but anyway...I just posted this on my blog, stimulated by this excellent discussion!

1. 4GW war is a conceptual tool. Debates like these show its power, generating new perspectives. Look at the comments posted at SWC {here}. Note how they assume that States are the only significant actors. 4GW suggests that this is not so. {as the discussion has continued, this is less so, note the previous comment!}

Major states, the important ones in global finance, tend to be reactive, incrementalist, slow, and conservative. For example, it is as likely that the head of the People’s Bank of China will push the red button on his desk – instantly selling a trillion+ dollars of US bonds – as President Bush firing off ICBMs at China.

But private actors are major players in global finance.

a. Asian and European institutional bond investors hold hundreds of billions of US bonds. Their losses as the USD loses value, esp. the EU investors, have been horrific.

b. Hedge funds wield over a trillion dollars in assets, far more than when they wrecked Europe’s Exchange Rate Mechanism on Black Wednesday 1992, or initiated a depression in SE Asia in 1997.

c. US investors in foreign bonds, esp. in Canadian, Australian, and Euro bonds, have had large returns.

Relatively small moves by US or international investors could destabilize the dollar – currency flight. Or a massive move against the dollar by speculators could do so.


2. We would know if we were on the brink of a crisis, wouldn’t we?

WWI was inevitable and obvious, the result of growing tensions in Europe. Or so the standard history reads. William Lind says…

One pebble touched off an avalanche. It did so because it occurred, not as an isolated incident, but as one more in a series of crises that rocked Europe in its last ten years of peace, 1904-1914. Each of those crises had the potential to touch off a general European war, and each further de-stabilized the region, making the next incident all the more dangerous. 1905-06 witnessed the First Moroccan Crisis, when the German Foreign Office (whose motto, after Bismarck, might well be, "Clowns unto ages of ages") compelled a very reluctant Kaiser Wilhelm II to land at Tangier as a challenge to France. 1908 brought the Bosnian Annexation Crisis, where Austria humiliated Russia and left her anxious for revenge. Then came the Second Moroccan Crisis of 1911, the Tripolitan War of 1911-1912 (a war Italy actually won, against the tottering Ottoman Empire) and the Balkan Wars of 1912-13. By 1914, it had become a question more of which crisis would finally set all Europe ablaze than of whether peace would endure. This was true despite the fact that, in the abstract, no major European state wanted war.
But this was not obvious to people at that time! Harvard historian Niall Ferguson looks at the prices of UK government bonds (gilts). These show complacency right up to the brink. City investors read of the mobilization orders, panicked, and the markets imploded.

Of course, we are much smarter than they. We would know if the world was on the brink of a crisis…

(I do not have a link to the Ferguson article. Will post when I find it).

[Shek]

Shek, it is not hyperbole to say this is "potentially a regime changing event". Most major experts in the field have said so, in one form or another. The BWII system assumes accellerating debt accumulation in the US, matched with US dollar reserve accumulation by foreign central banks.

FM,

My "hyperbole" comment is how you described the potential realignments as the end of the post-WWII financial order. The end of the post-WWII financial order was the end of Bretton Woods and the fixed exchange rate regime around the nth currency, the dollar, and its peg to gold. There have been financial crises that have come and gone since the collapse of Bretton Woods. If you were to describe the ongoing events as the potential for dollar hegemony to end, then your statement would be on the mark.

Given that, however, it is still not a big fundamental issue. There would be some rebalancing pain, but not a long-term impact. While I'm not a fan of Paul Krugman's NYT columns or his inequality crusade, he is a solid international economist, and I offer up the following two pieces written by him on the impact of the end of dollar hegemony.

http://web.mit.edu/krugman/www/seignor.html
http://www.ecn.wfu.edu/~cottrell/ope...0407/0079.html