.

. The sustainability of the new American Imperialism William R. Thomson wt@momentum-asia.com.hk Chairman of Momentum Asia Ltd 25 March, 2003 Because of the manner its was founded America was a latecomer to the idea of Empire. The concept of Manifest Destiny led to a short-lived experiment in a form off empire in the late nineteenth century as a result of the Spanish American war. After World War II empires went out of fashion, the main exponents in 'Old Europe' were no longer able to afford the luxury. The United States concentrated on its role as leader of the free world. Since the end of the Cold War the United States has been the world's sole superpower bestriding the world economically and militarily. The growth of its economy in the 1990s was so strong that even though it enjoyed a peace dividend and expenditures as a share of GDP declined, its absolute expenditures on the military continued to grow. Its military dominance became so total that its military expenditures are more than those of the next ten countries combined. This absolute military dominance seemed to elicit no strong policy response until the events of 911 showed that the country had enemies, albeit unconventional. However, 911 changed things. The urge to root out enemies is leading to a growing unilateralist bent, a policy articulated by a group of well-known neo-conservatives close to the Bush Administration. It has led to a willingness to downgrade the reliance on the carefully constructed web of international organisations, such as NATO, created to build a coalition against communism. The frustration with the United Nations and the Security Council led to last week's determination to go it alone in Iraq if necessary. And implicitly, there is still North Korea, Iran and other parts of the Middle East, including Saudi Arabia, to enjoy the benefits of regime change and be democratised in America's own image. This is an ambitious agenda indeed. But what is the cost of this policy? It seems that has not been carefully examined. We believe it is unaffordable and the policy will eventually have to be junked. The first Gulf War was essentially a mercenary exercise. Eighty to 90 percent of the costs were picked up by other members of the coalition especially, Japan, Saudi Arabia, Germany and Kuwait. The net cost to the US was less than USD 10 billion. But the estimated costs of Gulf War II increase by the day. Estimates of the US costs of Gulf War II vary from as low as USD 50 billion by the Administration to a 2.5 year range of USD 155 - 750 billion by former head of the Council of Economic Advisors under President Reagan, William Nordhaus. These figures include reconstruction costs. David Roche estimates the costs at almost USD 300 billion. But a roughly similar amount may have to be budgeted for strikes against North Korea and a portion of reconstruction costs. The combined effects of the Iraq and North Korean conflicts would be to increase the budget deficit by a further 2 percent to around 5 percent GDP and increase defence expenditures back to Cold War levels. The current account deficit is already almost 5 percent GDP and can be expected to increase under this scenario. But can this ever-growing US current account be financed? That is the fundamental question. There is evidence of dissatisfaction on the part of some dollar holders. Russia has announced its intention to increase its gold reserves to 10 percent of the total and to have a larger portion of Euros. China is increasing its gold holdings slightly and could go considerably higher. Islamic countries are flirting with a gold backed Islamic dinar to settle trade accounts, even though that would flout IMF rules. Saddam Hussein priced his oil in Euros from 2000 and made a tidy sum on the foreign exchange changes. Presumably, the first action of the US backed successor regime in Iraq will be to return to USD pricing and to make sure other oil producers hew the line. The world is not ready for this power grab by the US and it seems highly probable that the dreams of empire by the neo- conservative Bushites is economically unsustainable, will meet significant resistance and have to be adjusted. But it is not an environment to be long the dollar, US equities or short gold. Commodity based currencies such as the Australian dollar and the Canadian dollar should benefit and longer term, the Chinese Remnimbi would seem to have excellent revaluation potential. William R. Thomson 25 March, 2003 wt@momentum-asia.com.hk Bill Thomson is Chairman of the Siam Recovery Fund and advises governments and several asset management companies and institutions in Asia. He was formerly Vice President of a major international bank in Asia and is a former US Treasury official. He writes widely and we really appreciate his words of wisdom at 321gold. 321gold Inc Miami USA