 Life During Wartime
Dan Denning
The Daily
Reckoning
Feb 13, 2006
The Daily Reckoning PRESENTS: If you feel like things are rumbling
out of control and that something big and important is happening,
well, then, you're not alone. But what does all of it mean for
gold, for the dollar, for oil, for America? In fact, is there
more at stake than just the price of oil? Dan Denning explores...
When I got back from my excursion
to the Far East in late 2004 and sat down at my desk in London
to write up the story, I emphasized three major trends that would
create danger and opportunity for investors. First, the bull
market in energy (oil, gas, electric, nuclear) was going to be
one of the longest and strongest you and I would see in our investment
lifetimes.
The big drivers are the growth
in demand from China and India. Since then, of course, through
the work of Whiskey & Gunpowder editor Byron King, we've
seen how Peak Oil - the exhaustion of all the world's cheap,
easily recoverable oil - is driving up energy prices even higher
and faster than I thought, and also has complicated things geopolitically.
Second, the general rise of
Asia into the developed world was causing huge demographic and
economic dislocations - and creating enormous investment opportunities
as Asian economies began to consume as well as produce, to spend
as well as save.
Third, I wrote that the rise
of the East was accompanied by the simultaneous collapse of the
ruling currency regime of the last 30 years, the dollar standard.
This last point is still so inconceivable to many people that
they refuse to entertain the possibility. Too much would have
to change. Too much wealth would be destroyed. Too many vacations
would have to be canceled. Yet the inexorable rise of gold shows
that this revolution in money is slowly but surely eroding the
dollar's status.
Iran Nuclear Threat: Possible Effects
The current situation with
Iran doesn't change any of those three main trends. It accelerates
them, however, and adds the dangerous new element of nuclear
holocaust to the table. Let's be clear about one thing, though:
Even if Iran developed a nuclear device tomorrow, it would not
likely be the sort of thing they could put on a missile and fire
off to Tel Aviv... or Rome... or London. It would be a large,
unwieldy thing that they might be able to put on a jetliner.
(Incidentally, Iran recently announced the resumption of commercial
flights to the United States.)
Still, it's not a secret anymore
what Iran is trying to do. The question is, can anyone stop it?
Another question is does everyone really want to stop it? I would
argue that both China and Russia, though they might be deeply
uncomfortable with having a nuclear Iran, see it as an enormous
strategic blow to the United States and a key element of their
respective energy alliances with Iran. China and Russia, in other
words, are more than willing to let the world's nuclear club
expand. Doubtless, they feel like they'd have some measure of
control over Iran, especially since both countries have helped
Iran with its weapons program. Whether they will have any control
or not remains to be seen.
Let's leave aside all the speculating
about if the United States or Israel can or will attack Iran.
I have no idea. Nobody does. In analyzing the whole situation,
I found it useful to head to the bookshelf and dust off a copy
of Paul Kennedy's The
Rise and Fall of the Great Powers: Economic Change and Military
Conflict from 1500-2000. I'm going to quote from a few sections
that I think help explain how what's playing out across the globe
today is a result of both globalization and Peak Oil.
Unfortunately, if we follow
Kennedy's analysis, it's very bad news for America and for Americans
who fail to understand what's motivating our main economic and
strategic competitors. Emphasis added is mine. In the introduction,
Kennedy writes:
"The triumph of any one
Great Power in this period, or the collapse of another, has usually
been the consequence of lengthy fighting by its armed forces;
but it has also been the consequence of the more or less efficient
utilization of the state's productive economic resources in wartime,
and, further in the background, of the way in which that state's
economy has been rising or falling relative to the other leading
nations, in the decades preceding the actual conflict. For that
reason, how a Great Power's position steadily alters in peacetime
is as important to this study as how it fights in wartime."
Iran Nuclear Threat: The War on Terror
If you date the war on terror
to its beginnings, you could conceivably go back to the Iranian
hostage crisis of 1979-80. But let's use Sept. 11 as our start
date. Since that time, how efficient has the United States been
at using its productive economic resources? Not very, as I have
mentioned ad nauseam. That's because America continues to consume
more than it produces. Debt has driven a boom in American consumption
right alongside a war that doesn't seem to interrupt the daily
life of many Americans. If countries rise or fall based on the
efficient use of productive economic resources, then China, with
its 9.9% growth, is rising and America, with GM's $8.6 billion
loss last year, is not. America has been falling relative to
China and India for the last 10 years. Kennedy continues:
"The relative strengths
of the leading nations in world affairs never remain constant,
principally because of the uneven rate of growth among different
societies and of the technological and organizational breakthroughs
which bring greater advantage to once society than to another.
For example, the coming of the long-range gunned sailing ship
and the rise of the Atlantic trades after 1500 was not uniformly
beneficial to all the states of Europe - it boosted some much
more than others. In the same way, the later development of steam
power and of the coal and metal resources upon which it relied
massively increased the relative power of certain nations, and
thereby decreased the relative power of others."
My first essay for Whiskey
& Gunpowder, "The
Birth of Cultural Siege Engines," made the simple observation
that nuclear proliferation would alter the world's political
structure by making it nearly impossible for one country to invade
another. Such as it is, this might actually reduce the incidence
of war. It might also mean a very nasty but realistic situation
where dictators and tyrants are free to terrorize their populations
without fear of being toppled by invasion. After all, King Jong
Il is around because he has nuclear weapons. Saddam Hussein will
be executed sometime this year because he did not.
Iran Nuclear Threat: Economic Strategy
In historical context, nuclear
weapons are the long-range gunships of the Atlantic. They are
the great military equalizers. With the technological breakthroughs
on the nuclear black market, you can expect more nations to get
them. In a strange way, their spread might also dilute their
leverage. Once everyone has them, there will be no urgency to
get them. Military competition will turn back to economic competition.
For America, this means that
we are less likely to be able to use our military as a means
to achieve our economic strategy. True, aircraft carriers and
long-range bombers still give America the unique ability to project
force anywhere in the world. But a nuclear weapon and the means
to deliver it, that's really an army of one isn't it? How well
will America compete now that its great growth is behind it?
And what about China and India? They will be boosted, in Kennedy's
terms, by the proliferation of nuclear weapons to the extent
that global competition will be more economic than military.
And of course, resource-rich countries will enjoy the greatest
rates of growth and have the largest advantages of all:
"Once their productive
capacity was enhanced, countries would normally find it easier
to sustain the burdens of paying for large-scale armaments in
peacetime and of maintaining and supplying armies and fleets
in wartime. It sounds crudely mercantilistic to express it this
way, but wealth is usually needed to underpin military power,
and military power is usually needed to acquire and protect wealth."
Here we just find more somber
questions for America. America's productive capacity is being
systematically dismantled and shipped to China. If you don't
make anything, how can you sell it? And if you can't sell it,
what will you use to pay for your military? Without the means
to generate wealth, how will America maintain its power? By selling
bonds to our strategic adversaries? Come again?
In an energy-scarce, nuclear-abundant
world, the surest ticket to wealth, and thereby to power, is
energy. Those who have it - Russia, Iran, Venezuela - have tremendous
leverage - provided they can survive as nation-states. Those
who don't - America, the United Kingdom, Western Europe - will
find themselves not only less wealthy but less powerful. The
free ride to power, luxury, and apathy that the Peak Oil age
provided the West is emphatically, undeniably over.
Kennedy writes of this weakening
of national power, "If, however, too large a portion of
the state's resources is diverted from wealth creation and allocated
instead to military purposes, then that is likely to lead to
a weakening of national power over the longer term." You
might add that if states' resources and capital and their creative
energies are diverted and devoted to buying and selling houses
and filling them with trinkets bought on eBay, national power
is weakened. The consumption lifestyle to which America has grown
addicted does not produce capital. It does not produce wealth.
It does not produce power:
"In the same way, if a
state overextends itself strategically - by, say, the conquest
of extensive territories or the waging of costly wars - it runs
the risk that the potential benefits from external expansion
may be outweighed by the great expense of it all - a dilemma
which becomes acute if the nation concerned has entered a period
of relative economic decline."
If there have been benefits
to the war in Iraq, cheap oil is not one of them. The war is
not paying for itself with Iraqi oil exports. That war is not
paying for itself at all. It has become a major and costly national
undertaking, at just the time when America finds itself on the
wrong side of the wealth = energy = power equation and in the
fight of its economic life with rising powers India and China.
Kennedy writes:
"The strengths and the
weaknesses of each of the leading powers are analyzed relatively,
in light of the broader economic and technological changes affecting
Western society as a whole, in order that the reader can understand
better the outcome of the many wars of this period."
In the last few years, we've
seen how the broader "economic and technological changes"
of globalization are making the world more competitive and changing
social structures everywhere. Indeed, many of the great social
and economic institutions on which the postwar world was built
are falling like dominoes... the pension system, the United Nations,
the dollar standard... the beat goes on. In fact, about the only
thing preventing this migration of wealth and power IS the dollar
standard.
It allows America to fund its
wars and consumption with a depreciating currency. It is a tremendous
advantage Kennedy does not ignore:
"Since the cost of standing
armies and national fleets had become horrendously great by the
early 18th century, a country which could create an advanced
system of banking and credit (as Britain did) enjoyed many advantages
over financially backward rivals."
England survived its many wars
with France largely because of the creation of a funded national
debt, the issuance of bonds whose interest was paid by the efficient
collection of taxes. The modern warfare state is simply not possible
without "an advanced system of banking and credit,"
and that, for now, is exactly what is keeping America afloat.
The world still wants our bonds. China has nearly $800 billion
in currency reserves, its resource war chest.
But how long will this advantage
last? I suspect a lot will have to do with the price of oil.
As oil rises in dollar terms - whether from geopolitical tension
or the growing realization that Peak Oil is real - the run on
the dollar will grow. Hard assets like gold won't just be fashionable:
They will be indispensable to wealth preservation.
Soaring gold and oil prices
will be accompanied by soaring interest rates and inflation.
The convenient fantasy world where prices don't rise and the
dollar doesn't lose purchasing power will collapse. One day,
Americans will wake up and find that the money in their wallets
buys three-quarters or half as much as it did the day before.
The dollar will have lost status. America will have lost power.
And in the new world that emerges, possession of energy, not
a printing press, will be the key to wealth.
Regards,
Dan Denning,
 for the Daily Reckoning
Editor's Note: Dan Denning,
editor of Strategic Investments, is one of America's most respected
"big picture" analysts working today.
In his book The Bull Hunter,
Dan lays out all the details of how to profit in ways most investors
never imagined just five years ago. What's more, he'll show you
why it's never been more dangerous to put all your investment
eggs in the basket of the U.S. economy. It's a timely warning,
along with an exceptional opportunity.
You can buy The
Bull Hunter at Amazon.
321gold Inc
|
