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Old 11-10-2007   #1
slapout9
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On another thread I was talking to Fab Max about his comments on economic warfare, which I happen to think has a lot of merit to it. So let the discussion begin!



wiki examples of economic warfare!
http://en.wikipedia.org/wiki/Economic_warfare

Link to article on how Iran has declared economic warfare on the Us in response to US sanctions.....also suggest China could side with them

http://www.worldnetdaily.com/news/ar...TICLE_ID=52977

Last edited by Jedburgh; 11-10-2007 at 11:32 AM.
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Old 11-10-2007   #2
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Seems to me the best economic warfare against us is using ourselves as the instrumentality. Which is, I think a nice to have as far as the Kremlin boyz are thinking. I don't think there's much Iran can do to us. We have been putting ourselves in debt for these wars. That's my largest concern about them. World sliding Euro-ward.

The idea China is going to side with Iran is not credible to me on its face. China is in a deadly embrace with us economically. Trade ties and they hold a huge amount of our debt. There isn't room enough in the world for that amount of debt to be dumped. That's one of the benefits of being the biggest game in town with everyone else bit players.

http://www.federalbudget.com/
http://www.marktaw.com/culture_and_m...ionalDebt.html

That combined with demographic trends in the USA is worrisome because boomers aren't going to be saving too much longer.
http://www.census.gov/prod/2001pubs/c2kbr01-12.pdf Scroll down to the age demographics and then slide the graph forward 7 years to the present.

But, overall trends in the world have been looking up for a long time with very few blips.
http://www.gapminder.org/

Last edited by Brian Hanley; 11-10-2007 at 02:40 AM.
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Old 11-10-2007   #3
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Originally posted by Brian Hanley:
Quote:
The idea China is going to side with Iran is not credible to me on its face. China is in a deadly embrace with us economically. Trade ties and they hold a huge amount of our debt. There isn't room enough in the world for that amount of debt to be dumped. That's one of the benefits of being the biggest game in town with everyone else bit players.
The PRC has their own sets of issues that make any idea of a mass dump of their accumulated economic assets rather unlikely. There's been sustained coverage by the WSJ over a number of these issues, and China has some rather serious issues that they are trying to manage.

First off, Iran likes $100 a Bbl. oil. But the PRC has real problems with $100 Bbl. oil - even bigger problems that we & the EU have. China subsidizes fuel, to the point where the WSJ recently noted that per gal. diesel prices in China run about $2.40 a gal., vrs. at least $3.15 a gal. here in the US, and much higher in the EU. And it appears they subsidize all types of fuel. Plus they have to buy most of their oil in dollars, which is why they need that vast (One Trillion+) liquid pool of dollar denominated assets.

Now, Iran has made noises about only accepting the Euro for oil, but this is even less helpful not just for the EU (raises their currency value even higher, which is literally the last thing they want right now - makes their exports even more expensive), but also for China, that just kills them, because it's a triple hit - (a) Buy more imported oil, (b) At increased subsidy costs for each liter sold, and (c) they have to spend cheap dollars to buy more expensive Euros to pay for each Bbl. of oil.

And there's a real wild card out there that only the financial types are seemingly paying attention to - Most people don't realize that over the past several years, China's domestic stock market (which outsiders cannot invest in) has had more IPO (Initial Public Offering) activity than anywhere else in the world, including in the US. The Chinese stock market currently has an uncanny resemblance to the 1999-2000 Internet/IPO market which melted down into what became known as the "Dot.Com Bust". If their internal stock market blows up, it's going to be interesting times indeed.

Hard to believe, but that trillion dollars piggy bank can shrink pretty rapidly.
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Old 11-10-2007   #4
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While the West has tended to view war as something normally separate from the rest of life, many of the Rest have tended to view war as the normal state of life, and therefore, war is waged against one's enemies in every aspect of life. That Iran sees fit to wage economic war upon the U.S. simply fits in that regard.

After all, Iran doesn't have anything that can take on Mickey Mouse at the cultural level - in a rather extended sense something that seems to be one of Iran's chief beefs with the U.S. - so Iran has to make an end-run around Mickey and Minnie and Donald Duck et al and hit the U.S. where it can still try to hurt them most, especially at the strategic level. At said level, the U.S. is vulnerable economically, and the weaknesses most exposed to Iranian attack are the price of petroleum and the value of the dollar.

That said, the U.S. waged a very effective economic campaign against the U.S.S.R. in the 1980's, and, combined with a comprehensive set of proxy wars, information warfare, cultural warfare, diplomatic pressures, alliances, support of dissidents and subversion, etc., took advantage of the weaknesses within the Soviet system to help to bring about its downfall. And without a single US Battalion having to be sent into battle against the Red Army. This sort of warfare was somewhat more in line with that of ancient Chinese military theory, for example, than with 20th Century Western military theory.

Nevertheless, US strategists of the 1980's clearly saw that to defeat the Soviets by military means was simply not worth the candle; other means were required, and in the circumstances, worked. At the risk of over-simplification, the US simply spent the USSR into the ground on military technology and procurement, knowing that the US could afford such expense, but the USSR would succumb to its own internal weaknesses in attempting to follow the US.

Nor is the US an amateur at economic warfare: that is how the US won during the Recent Unpleasantness, albeit in tandem with actual military force. The US Army pillaged, tore up, and burned out the economic heartland of the South in late 1864-early 1865; the US Army fighting in the Lower South deliberately avoided giving battle in most cases, and simply manoeuvered the Confederates out of their positions. Both World Wars involved the economic blockade and attempted strangulation of each others economies by both sides. In World War I, the Germany economy finally collapsed and the population starved; military collapse followed within months. Germany nearly accomplished the same thing with Britain in the spring of 1943.

Chinese strategic and military thought does not make a modern Western-style distinction between war on the one hand, and the life of society/civilization on the other. The use of military force is theoretically and ideally the final phase of a given war between enemies; prior to that, the war is waged by all other means, including economics. Only when the enemy is sufficiently weak, or is anticipated to become stronger later, is then directly struck with military force. But it is all war, the struggle for survival, growth, and supremacy, and from such perspectives, that's what life is about. A grim, red-in-tooth-and-claw neverending struggle for dominance.

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

Last edited by Norfolk; 11-10-2007 at 03:22 AM.
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Old 11-10-2007   #5
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Well, I bought gold some time ago, that's all I know. The housing slump I think took everyone by surprise and the whole world has known about us running in the red for a long time but Iran has huge energy contracts with China. Israel is the wild card from China's point of view and with the falling DOW, they have to be extremely worried on both counts. The world's economy can tolerate an attack on Iran better than it can a nuclear armed Iran IMO. I think even Boscoe (FM) would agree with that.
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Old 11-10-2007   #6
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Default Re:

Tonight's evening news had an interesting story on how Canadians are sweeping down into Washington to take advantage of our sliding dollar and the State Patrol is expecting huge traffic issues due to the increases from them during the upcoming Christmas Shopping...(or should I say "Holiday Shopping?")...

I must say these are interesting times to be around. I'm not a FOREX or arbitrage guy but I think China has so much tied up in our dollar that any moves against it would cause them devasting losses. It appears to be a bit of a catch-22 since they hold so much of our debt. If we do get into it with them I am more concerned with their Information Warfare capabilities in the cyber/SCADA realms. That is my cents worth....

Last edited by bismark17; 11-10-2007 at 03:56 AM. Reason: Grammar.....
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Old 11-10-2007   #7
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Quote:
Originally Posted by bismark17 View Post
Tonight's evening news had an interesting story on how Canadians are sweeping down into Washington to take advantage of our sliding dollar and the State Patrol is expecting huge traffic issues due to the increases from them during the upcoming Christmas Shopping...(or should I say "Holiday Shopping?")...

I must say these are interesting times to be around. I'm not a FOREX or arbitrage guy but I think China has so much tied up in our dollar that any moves against it would cause them devasting losses. It appears to be a bit of a catch-22 since they hold so much of our debt. If we do get into it with them I am more concerned with their Information Warfare capabilities in the cyber/SCADA realms. That is my cents worth....
Agreed bismark. China in many ways is so dependent upon US economic growth and stability that disrupting the US economy is like cutting off one (at least) of their own limbs. Pretty soon, US pressure on China to allow the Yuan to reach its true value may be quite unnecessary. China has no interest in, and a lot to lose from, continued US dollar devaluation.

For that matter Iran can have little impact through straight economic means upon the US. Only blocking the flow of oil (direct military means) could seriously affect the US economy. And Iran has no economic interest (to say the least) in doing that.

Them Canajuns, though, I tell ya', I'd be keepin' a close eye on them. They think they can just blend in and not be spotted while they implement their nefarious schemes of economic subversion of the US...well, I say take out all the Molson and Labatt breweries, and proceed to drown them in Miller and Bud - I drink Guinness by the way, so I should still be okay.

Last edited by Norfolk; 11-10-2007 at 04:12 AM.
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Old 11-10-2007   #8
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Default economic warfare

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?
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Old 11-10-2007   #9
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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?
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Old 11-10-2007   #10
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Default China, not dependent on the US

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.
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Old 11-10-2007   #11
Fabius Maximus
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Default Much of the 21st century may be events foreshadowed in the 1970's

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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.
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Old 11-10-2007   #12
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That said, the U.S. waged a very effective economic campaign against the U.S.S.R. in the 1980's...
Alternative view: the Saudi Princes waged one of the great economic wars of the post-WWII era against the USSR for control of the oil industry. They opened their spigots, crashed the price of oil, and bankrupted the USSR.

We take credit for defeating the USSR just as we often take credit for defeating NAZI Germany. Perhaps neither is fully deserved.
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Old 11-10-2007   #13
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Originally Posted by Fabius Maximus View Post
Alternative view: the Saudi Princes waged one of the great economic wars of the post-WWII era against the USSR for control of the oil industry. They opened their spigots, crashed the price of oil, and bankrupted the USSR.
I'm not sure the oil price lows of the mid- 1980s had anything to do with such lofty strategic aims. Rather, they were a combination of an increase in supplies and stocks due to high prices following the Iranian Revolution; a slowdown in demand due to these same high prices; and ambitious Gulf development expenditures (and hence pressures for larger OPEC quotas). When the price started to drop, the Saudis eventually tired of being the swing producer, and instead for a while sought to maintain revenues by offsetting price declines with production increases.

At most the (secondary) strategic aim was to reduce the market share of high-marginal-cost oil producers (with North Sea, older-well North American producers, and new explorations being more vulnerable by this time than the Soviets were).
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Old 11-10-2007   #14
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Originally Posted by Fabius Maximus View Post
Alternative view: the Saudi Princes waged one of the great economic wars of the post-WWII era against the USSR for control of the oil industry. They opened their spigots, crashed the price of oil, and bankrupted the USSR.

We take credit for defeating the USSR just as we often take credit for defeating NAZI Germany. Perhaps neither is fully deserved.
As to the role of Saudi oil in bankrupting the USSR, it was contributatory, but insufficient even in tandem with other factors. Additionally, the USSR was the largest producer of petroleum on the planet, and its reserves considerably outweighed those of Saudi. Not only was it quite self-sufficient for its own needs, but it could earn a pretty penny in foreign hard currency with its exports.

And considering the price of oil after 1973 compared to the price of oil prior to late 1973, even with the Saudis in effect generously subsidizing the West by keeping oil prices artificially low, such prices were still historically high; WWII was fought on $3 a barrel oil. Under no circumstances was the price of oil at any time post-1973 a major problem for the USSR, one way or the other. Even at only 6 times the 1940's price, the Soviets were making out pretty good.

As far back as the early 1970s, Kissinger had arrived at the conclusion that the Soviet economy would be unable to sustain its military strength much past 1984-5. The Soviet system was cracking internally, and the sheer burden of trying to keep up with US military equipment and R&D spending created unbearable stresses on a system that was dealing with general disillusionment at home, dissent within the populations of its satellites, and its own faltering economy - so badly mismanaged that it had to buy large quanitities of cereals from Western countries for years. The Soviet Union was crumbling under its own weight while its subjects were chipping away at it from within; the US pile-on in the 1980's forced an issue that could otherwise have dragged on for a few more decades had a rather less aggressive policy been pursued.

I'll grant you partially the comment about the defeat of Germany in WWII; but as to "we", I'm not American, and can assure you that the Commonwealth view of the outcome of WWII that it was won by British Brains, Russian Blood, and American Muscle differs substantially from the more popular US view. But the Commonwealth view is in no doubt that American Muscle was utterly essential to the defeat of Germany. No American muscle = no Nazi defeat.

Chinese investments (such as in US T-Bills) are being hurt by the devaluation of the US dollar, not only because even interest rate hikes (which are not occurring at the moment) are unlikely to be able to make up for the dollar's loss of value, but also because to convert cheaper US dollars into more expensive currencies entails additional loss. China is stuck holding the bag until the US dollar stabilizes - and the PLA's pay increases and equipment purchases are funded in no small part by hard currency earned from exports to the US.

In any event, economic warfare has long been a civilized way of taking the fight to the enemy, particularly for nation-states. It is but one of many ways war is waged by the state against its enemies, whether military force is directly applied or not: "Learning from the Stones: A Go Approach to Mastering China's Strategic Concept, Shi," by David Lai.

http://www.strategicstudiesinstitute....cfm?PubID=378

This article on Chinese strategic thought is for the most part easily assimilated, and this is assisted by the essential simplicity of Sinic conceptions of strategy. It is not complex, merely subtle and thoroughly comprehensive. Although this article is hardly comprehensive, and is fairly fundamental, taken with the Chinese strategic classics, there is little that subsequent theories of war do much other than add commentary or technology.
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Old 11-10-2007   #15
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Default Necessity is the Mother...

Necessity is the Mother of invention...

I believe it was 2006 when the Saudi representative to OPEC said that contrary to popular belief, Saudi Arabia had no interest in unstable and steeply rising oil prices. At that time, he Saudi's had promised to increase production by 900k. His reasoning was very simple. If oil prices continued to rise uncontrollably, eventually, it would effect the world economy and crash the supply demand in world wide recession or depression. Thus, destabilizing their own economy, causing unrest and potentially to internal unpleasantness.

However, this year the Saudi OPEC rep said that they could do no more to increase supply and stabilize the price. Thus, I believe the Saudi's are doing what we are doing and that is waiting to see what the market will do.

Their other fear is that, if the price hits the "pain threshold" for the US and Europe, we will do what we did in the late 70's and 80's like revamp our automobile manufacturing for improved fuel economy or possibly drive towards the invention of alternative energy. I don't think biofuels is a sustainable or long term answer. I believe the answer will return as solar or other energy sources with the advancement of nano-technology and anti-matter. But, that's for another discussion.

Suffice it to say, even with emerging economies and China's growth, if the US was able to develop other energy resources or, if oil finds in other nations (like the recent find in Brazil) can come onto the market quickly, the oil surplus that would be created would cause the oil market to crash. Not only is that bad for Saudi Arabia, its bad for Russia whose economy is also 50% reliant on energy exports. It's why they are in a rush to complete a transnational pipeline for gas and oil to China. They want to take advantage of a long term market growth when there is a possibility of stagnation or loss of market in other regions. Also the reason Iran was interested in pipelines with China. Problems with that to follow.
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Old 11-10-2007   #16
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Default Economic Warfare with Iran

In regards to economic warfare and Iran, I noted here (scroll down and to bottom for additional links on Economic Warfare and Iran), whether Iran survives economically or not is not just linked to their oil and natural gas income, though it plays a major part, both good and bad.

For instance, Iran is now talking about building eight additional refineries for oil. Right now, they only have one. They are still rationing gasoline, though at a subsidized rate. The problem here is that, however much they are raking in on a bbl of oil, as a net importer of refined oil and gasoline, they are putting out a very large chunk of their income to buy it. It might sound good on paper, but it causes other issues.

Second, Iran is suffering from record inflation to go along with its "growth" period. Inflation is, in fact outstripping economic growth about 4 to 1. Housing prices have tripled. Food prices have quadrupled. This is in relation to both the incredible inflation of oil and the sanctions which have denied credit to even the basic importers. Some have sought an end run by working through third party nations like Dubai and Germany where they set up what appears to be other national companies. Yet, the price to import these food stuffs has increased along with the necessity to use huge, upfront cash deposits.

At the same time, Iran has been busy trying to repress their labor movements that are demanding a pay raise after over a decade of the same pay (most are making about $2/day). These people are having to work two or three jobs just to feed their families, buy gasoline and pay for heating, much less housing now that the rates are increasing so drastically. For the last two years, parts of Iran have had to institute heating rations because the nation is so dependent on exporting their energy resources to sustain their economy. Besides oil and natural gas, the third largest export from Iran is Hydro-electricity to Afghanistan and Iraq.

I posited a theory once that the unrest in Iraq and Afghanistan benefited Iran, not just politically, but economically since it keeps infrastructure from being developed in these nations to offset that export as well as the somewhat limited income from export of manufactured goods.

This need is created by their Soviet style economic system. More than 70% of all working Iranians are employed in a state run business. appx 50% are in the oil and natural gas industry which is just about the only money making industry out of Iran. Another 30% work in the service industry that is largely controlled by the IRGC, but have limited "money making" capabilities since it simply funnels internal funds from one hand to another. They do control certain textile and other manufacturing plants as well as mineral extraction.

At this time, neither their manufacturing nor mineral extraction nor even export of some food stuffs (another reason that food prices are high in Iran) is anywhere near being able to produce the amount of revenue necessary to create a diverse economy. Neither are the only 10% of private entrepreneurs in Iran capable of producing much in the way of export. While the Iranian Islamic Revolutionary dream is to create a self sustaining economy (as was once the Soviet model), it is impossible with the existing business and economic structure.

Their manufacturing and mineral extraction is in bad shape. Earlier this year, one of the showdowns that was happening in the Iranian cabinet was an argument between these two industries and the oil and natural gas industries over revenues produced as well as the amount of money being invested. They were accusing each other of being the cause of the economic problems in Iran. Even with all that energy export revenue, inflation is seriously damaging their capabilities to continue running the nation.

The mineral and manufacturing industries fought back stating that, if they had the infusion of cash that the oil and gas industry had to improve their infrastructure (including machines, transportation and even roads), they could be in a better place to produce revenue. Ahmadenijad settled that by replacing the mining and manufacturing industry ministers.

If you are truly familiar with the economic woes experienced by the USSR pre-collapse, you'd know that they suffered similar problems. Like the USSR, Iran has many price controls in place which means that these industries cannot even make money internally to help improve the situation.

Agriculture is equally damaged from lack of investment and expansion along with orders to export most of the food stuffs that created the net import of grains and other food staples like vegetables and fruit.

All of Iran's economic growth is in oil and natural gas. It is unsustainable. Unless, of course, they can get nuclear weapons and improve their regional hegemony, holding other regional suppliers "hostage" and forging alliances with countries like Venezuela, keeping oil supplies down and the price high by artificial reductions or limits. (Something that would be of some benefit to Russia as well since their economy is so heavily invested in the energy sector).

Other problems that Iran has is that the threats of potential strikes by the US have forced them to spend more on defense, though not much, it is still damaging. In fact, besides the probability of nuclear proliferation by Korea to Syria that precipitated a recent strike against Syria, the fact that Israel was able to easily circumvent Syria's Russian bought air defense system has caused Iran to have to invest in upgrades, further stressing their budget, along with other military equipment and preparation.

This juggling of funds and budgets is also apparent in their continuing inability to pay full monthly fees for the building of the Bushehr nuclear facility. Which has caused Russia to state they will continue to build the facility, but there will obviously be a slow down. In the meantime, Iran is putting a lot of money into buying and making centrifuges and other equipment for creating nuclear technology.

the long and short of it is, all of the money is staying at the top end, within major government structures, one major industry and being spent on imports of equipment and basic necessities outside the country. That is what is fueling inflation and keeping government run entities from increasing pay to workers. Money is not filtering down in the economy to allow for improved internal economic growth. Of course, corruption and Ahmadenijad's insistence on putting old IRGC cronies in position of power over these industries is creating a whole new economic class paradigm in Iran.

It's a point that we should be exploiting in our information warfare. Particularly, as the previous high separation of the economic classes was part of the original causes for the Islamic Revolution. The Islamists promised at that time to institute a more equitable "Islamic" system that had its roots in socialist economics learned in the universities of France and other European nations. the reason, of course, that the leftward, labor movements of Iran originally supported the revolution.
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Old 11-10-2007   #17
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Default China-Iran Matrix

Back to the China-Iran oil and gas pipelines. These two inked a deal in 2004 for a ten year plan to create these pipelines that sought to by pass certain nations and the pipeline fees they would have to pay by planning to build these pipelines under the ocean, through the Straits of Malaca and the China Sea. ONe of the reasons that China has been making threatening noises towards Taiwan and arguing with Japan over control of long disputed Islands. They want to extend their international waters to protect these potential pipelines and work towards extracting resources that are just outside of their current boundaries.

Also one of the reasons that China has been working hard to improve their littoral navy and seeking possible aircraft carriers. They would have to protect this pipeline. It's very position through international waters would make it vulnerable to interdiction.

The problem with the pipelines are not just international borders. Neither China nor Iran at this time has the funds currently to invest in developing this pipeline. Plus, Russia's offer of an overland pipeline is much more feasible and possibly less expensive since it would be a major spur off of existing lines in the east and through the Caucus nations. Making the Iranian pipelines not quite the necessity they might have been if Russia simply maintained its focus on European markets.

Finally, sanctions that limit the amount of investment into Iran by any American corporation keeps Iran's ability to update its infrastructure limited and this pipeline a dream for the near future. which makes the proposition for eight new oil refineries interesting. Exactly how are they planning to build these refineries without huge foreign investment? Is China interested in that deal? Is the need for cash to spend on these investments and to offset inflation in China the reason that China is seeking to divest itself of some of its US assets. They need the cash for other projects and subsidizing their own gasoline.

One of the other things to look at is China's reluctance to support Iran as a full fledged member of the SCO. The SCO pact insists that an attack on one country is an attack on all like the NATO agreement. I think China sees that risk as too high considering their relationship with the US and their own desire to avoid conflict at this time (being without more than a littoral navy and their blue navy not anywhere near full strength). They are after long term economic growth and power, not war today.

Will China be enough of an investor for Iran or will Russia or Europe step up to invest? Would Russia do so at all considering their own interests in producing and exporting oil and refined products? is there an offering for a Russia/Iran pipeline that would allow oil to be refined and transported out of Iran through the Hormuz Straits? For Russia, a third or fourth port for exporting would be helpful, particularly one that bypassed the Dagestan, Igushetia and Chechen region. A long part of the Caspian Sea to port transportation system runs through this highly volatile region.

ON the other hand, the ME is highly unstable and risky for Russia unless they can help steer Iran towards more sane policies or offer more protection (a reason why they are upgrading their military besides their desire to hold sway over the Caucuses?)

Of course, Iran sees that Afghanistan and Iraq, developing nations with limited capabilities, as potential economic gold mines. Iran had also inked a deal with the new Iraqi government to refine oil for gasoline and pipe it back into Iraq. The problem, again, is that Iran has one refinery. Any utilization for export puts a strain on their own resources and increases the amount of net imported gasoline it requires for the state to function. Of course, this agreement put the Iranian oil minister in hot water with Ahmadenijad since it put further pressure on Iran's internal shortages.

They may be looking for Iraq to invest in the development of these refineries. Unsure on the possibilities. It is also unsure of the amount that European companies want to put into these additional refineries. To date, they have been pretty hesitant in investing large amounts in existing infrastructure. largely because it is so costly and secondly because Iran has been unable to or reluctant to put their share in, leaving these companies to shoulder most of the burden.

An additional problem is that investors see Iran as a high risk investment. Not just because of sanctions, but because of their internal economic structure. They don't want to risk what they are unsure of getting back. Not to mention that Iran in the previous decade and a half has taken considerable advancements against their oil revenues and has a tendency to nationalize certain industries.

According to current reports, Iran is only trading approximately 15% of their oil in US dollars right now. More than 50% is in Euros. The rest are in other denominations. This also presents a possible opportunity undermine their economy. Another factor in the demise of the USSR was the development of a large blackmarket that operated on the US dollar. The decrease in the value of the dollar could be somewhat helpful in this matter, allowing Iranians to purchase more black market commodities. Not only would this put another drain on the government run economy, reducing money returned into their economic system, but possibly devaluing their own currency against a black market currency.

The one problem with that is the IRGC controls the black market and smuggling in Iran (one of the reasons why we know they were complicit in the smuggling of EFP components and other arms into Iraq and Afghanistan). This might put more money in their hands. We would have to have a way to bypass it or make them complicit in their own economic downfall. Corruption in other states is sometimes good for us.
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Last edited by kehenry1; 11-10-2007 at 12:28 PM. Reason: Missing sentence on Iran/Iraq refinery agreement.
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Old 11-10-2007   #18
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Default Devaluing the US Dollar: Not All Bad

In regards to the devaluing of the US dollar. It is not always a bad thing. We have been running a significant trade deficit for years. At the same time, this administration has signed a significant number of free trade agreements with nations in South America, Eastern Europe and Caucus nations among the many. In order to make that a real, viable interest of our economy, these nations have to be able to afford to buy our goods. That means that their currency has to be somewhat competitive with ours.

We don't just want to put money in their economies buying cheap goods (thus reducing our trade with China and some of our economic risk), we want them to put it back into ours. As this report indicates, exports to Europe, where the Euro is strong against the dollar, has increased significantly and probably lent a 1 point increase in growth. that is actually good in the long term in creating US manufacturing mobs and staving off severe recession.

Our vulnerability though is the risk of a over extended credit lines and the price of oil. continued economic growth could off set the extended credit problems. the price of oil, on the other hand, can be offset by either a serious down turn in economy, thus oil utilization, an increase in availability through additional drilling either within the states or in new deposits or in old deposits with new technology or a new technology all together when we hit the "pain point".

I am hoping we work on the new technology. Not because I believe we will be totally oil independent, but because it would give us again the upper hand on energy development and control and create a new economic paradigm for the west. The potential income from both small and large markets would be a serious economic boon, not to mention the impact on many other industries like transportation and housing.

so, dollar down turn is not totally a bad thing as long as it is in small increments, over a measured time and stabilizes early enough. Improved economies in this hemisphere would provide a fairly protected market for us and diversify away from the East and the control of our markets by China and the ME.

Wow, hope that was coherent enough. You can visit the other links provided for additional information and reporting on the economic war. Just remember, high oil prices aren't necessarily good for even our most virulent enemies. They have to buy gas, support business, transport goods and maintain their military, too. all with not even a one hundredth of our income or budget.

Think of them as an octopus trying to put their tentacles all over the middle east. Everywhere they seek to expand, they expose themselves economically, politically, and even physically. a country with a 300 bil budget is hard pressed to compete on that level even regionally.

Pardon the length of this post. I hope it is coherent though I know there are many more issues that could be included in this analysis.
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Old 11-10-2007   #19
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Originally Posted by Fabius Maximus View Post
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.
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Old 11-10-2007   #20
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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.

Last edited by Shek; 11-10-2007 at 03:55 PM.
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