Posts filed under “War/Defense”
Nowhere Near Over
David R. Kotok
February 23, 2011
This is nowhere near over.
By “This”, we mean the regional contagion, spreading violence and rising geopolitical risk in the Middle East and North Africa. Reports say that Libya has stopped producing oil and that pipeline delivery to Europe (Italy) is interrupted. Libya seems headed for complete dismemberment and full-blown civil war.
Note that China is evacuating 15,000 workers. China! Imagine that we learn there are as many workers from China in Libya as there are workers from Egypt. Anyone still think this is a local idiosyncratic event.
We are watching a “sea change” occur among one tenth of the world’s population and among the world’s low cost marginal producers of the world’s energy. Scenarios with benign outcomes and peaceful transitions appear remote.
Note how the region’s worst of the bad actors seize their opportunities where they find them. Every success emboldens them. A case study is Iran’s two ships transiting the Suez. Also, note how the most suppressive regimes like Syria, Iran, Saudi Arabia, Libya have learned how to suppress social networks, cut off cell phones, block internet traffic and reverse or alter the information flows.
Consider that suppressive regimes are not an encouraging environment for business risk taking and capital investment. This true around the world. Despots maintain their power with only harsh methods whether in the Middle East or North Korea or Venezuela. Simply put: a thug is a thug. Their actions eventually stymie and persecute thoughtful and creative internal forces. Despots raise costs and lower production. In addition, the energy dependent western democracies are now learning that despots are also not reliable longer-term partners.
Also, consider that success by demonstrators and protesters leads to additional demonstrations and increasing demands for reforms. We believe that the turmoil and regime change in the region has a long way to go. We also believe that forecasting the outcomes is a highly problematic exercise. Do we end up with open democracy or Islamized fundamentalist states or something else? This is going to be determined on a case-by-case basis. We do not know the outcomes. History says that emerging democracies are rare in the Middle East.
A sea change can bring on a protracted period of higher oil and energy pricing. The US economy is ill prepared for it. Our policies border on madness. We do not drill for oil off our coast. In the Gulf, deep water drilling is encouraged in Cuban national waters but not in American waters. On American land, we spend billions subsidizing an uneconomic program called ethanol. We raid the federal treasury to put money in the pockets of the politically connected few. In addition, we raise the price of corn and farmland and global Ag output to increase the starvation of millions of people. Thank you Washington and specifically a few members of America’s congress.
Back to the Middle East. Consider that a 1-penny increase in the price of a gallon of gasoline acts as a sales tax on consumers at the rate of 1.2 billion dollars a year (Naroff Economics estimate). A one-dollar rise in the price of oil eventually leads to a 2.5-cent increase in gasoline on average (Moody’s estimate). It is easy to get to a $4-$5 range for gasoline in the US.
Add that to the food price surge and we have a shock. We have already consumed about half of the 2% payroll tax cut. It appears higher gas prices will use up the other half and more by Memorial Day. Gasoline at 4 to 5 dollars a gallon will be enough to turn the improving consumer sentiment numbers into deteriorating ones and will hurt the fragile economic recovery. It will also set back any hope for stability in the housing sector.
If we flirt with a double dip recession, the Fed may be debating QE3 by late summer. So far, QE2 seems to have little impact. It may turn out to have been too small to do very much. A few hundred billion in a mass of many trillions is not very much.
Consider that there has been no significant increase in the amount of federal debt reaching the markets. To get to that conclusion, add up all the new treasury issuance, subtract the shrinkage of Fannie and Freddie debt and subtract the Fed’s purchases. The net result is that most of the federal deficit is being financed without increasing the publicly traded portion.
So why have treasury bond interest rates risen since QE2, if they are not driven by the deficit. They may be driven by inflation expectations or flight from the dollar or re-allocation of portfolios. However, they do not seem to be higher due to direct federal borrowing from the markets.
So where is this going?
Any slowing of the US economy from this energy shock may act to lower interest rates and dampen inflation expectations. Higher energy prices can mean that something else does not get purchased. We may see substitution and not inflation.
At Cumberland, our US ETF accounts are in the highest cash position they have seen in over two years. We think being full invested when there is a shooting war in a major oil producing country is folly. There is one position that must be maintained. We are high in energy overweight. We are underweighted in consumer discretionary exposure.
This is nowhere near over.
David R. Kotok, Chairman and Chief Investment Officer
Gaddafi’s Rule Appears in Jeopardy
Libyan leader Muammar Gaddafi’s four-decade-old rule appeared in increasing jeopardy on Monday as anti-government protests reached the capital of Tripoli for the first time. Reuters’ Jon Decker reports.
2/21/2011 5:15:06 PM
Libya Crisis Makes Diplomatic Waves
U.N. chief Ban Ki-moon and the Libyan envoy to India react to reports of Libyan warplanes targeting civilians during mounting unrest. Video courtesy of Reuters.
2/22/2011 12:53:56 PM
Dictator Loses Grip in Desert
CHARLES LEVINSON in Tobruq, Libya, MARGARET COKER in Abu Dhabi and TAHANI KARRAR-LEWSLEY in Dubai
WSJ, FEBRUARY 23, 2011
click for updated futures > As prophesied on Sunday, my travel plans have once again caused a dislocation in the global balance of market forces. In other words, the futures are getting whacked, and it look like the day will start pretty ugly. SPX is down about 20; Dow off over 120. Oil rocket up…Read More
Source of the Iraqi WMD Claims Comes Clean … And Shows that the American and British Governments Willfully Manipulated the Evidence
As I’ve repeatedly pointed out, everyone knew that Iraq didn’t have WMDs.
The Guardian just interviewed the the infamous “Curveball” who provided false evidence about Iraq’s weapons of mass destruction. Curveball admitted that he knowingly lied about WMDs, in order to topple Saddam Hussein. The Guardian has a series notes in a series of articles out today on the issue which reinforce the conclusion that the American and British governments deliberately manipulated the evidence to justify the Iraqi invasion.
In one article, the Guardian notes :
The former head of the CIA in Europe … Tyler Drumheller, who says he warned the head of the US intelligence agency before the 2003 invasion of Iraq that Curveball might be a liar ….
“My impression was always that his reporting was done in January and February,” said Drumheller, adding that he had been warned well before 2003 by his counterparts in the German secret service (BND) that Curveball might not be reliable. “We didn’t know if it was true. We knew there were real problems with it and there were inconsistencies.”
He passed on this information to the head of the CIA, George Tenet, he said, and yet Curveball’s testimony still made it into Colin Powell’s famous February 2003 speech justifying an invasion. “Right up to the night of Powell’s speech, I said, don’t use that German reporting because there’s a problem with that,” said Drumheller.
He recalled a conversation he had with John McLaughlin, then the CIA’s deputy director. “The week before the speech, I talked to the Deputy McLaughlin, and someone says to him, ‘Tyler’s worried that Curveball might be a fabricator.
“And McLaughlin said, ‘Oh, I hope not, because this is really all we have.’ And I said, and I’ve got to be honest with you, I said: ‘You’ve got to be kidding? his is all we have!’”
In a second article, the Guardian reports:
A senior aide to Colin Powell at the time of his pivotal speech to the United Nations said on Tuesday that Curveball’s admission raised questions about the CIA’s role.
Lawrence Wilkerson, who was chief of staff to the then US secretary of state Powell in the build-up to the invasion, said the lies of Rafid Ahmed Alwan al-Janabi, also known by the codename Curveball, raised questions about how the CIA had briefed Powell ahead of his crucial speech to the UN security council presenting the case for war.
In particular, why did the CIA’s then director George Tenet and his deputy John McLaughlin believe the claim by Curveball, “and convey that to Powell even though the CIA’s own European chief Tyler Drumheller had already raised serious doubts.
“And why did Tenet and McLaughlin portray the presence of mobile biological labs in Iraq to the secretary of state with a degree of conviction bordering on passionate, soul-felt certainty?”
“This is very damning testimony and an indictment of the work the US put into the pre-war intelligence. The decision to go to war, to spend billions on sending hundreds of thousands of soldiers to the region, was in large part taken on the basis of an admitted liar,” said Ashwin Madia, head of an organisation of progressive US military veterans, VoteVets.
Judith Yaphe, a former CIA analyst on Iraq now at the National Defence University in Washington, said … “There were people at the time who doubted what Curveball was saying, but if the administration doesn’t want to believe it, it doesn’t make much difference.”
It is obvious that America has long supported dictators, instead of democracies, in developing countries.
Is it simply – as Noam Chomsky asserts – that America supports strong men who will ensure that their country acts as a “client state” to the U.S., and moves to crush countries which refuse to act as satellites to the U.S.?
But – as usual – faulty economic models are part of the problem.
Specifically, Morton Halperin, Joe Siegel and Michael Weinstein co-wrote a book called The Democracy Advantage: How Democracies Promote Prosperity and Peace, published by the Council on Foreign Relations in 2005, which provides insight into the economic model used to justify America’s historic support for dictators.
Halperin is no outsider, being a high-level adviser in the Clinton, Nixon and Johnson administrations and to the Council on Foreign Relations. In the Johnson Administration, he worked in the Department of Defense where he served as Deputy Assistant Secretary of Defense (International Security Affairs), responsible for political-military planning and arms control. During the first nine months of the Nixon administration, Halperin was a Senior Staff member of the National Security Council staff with responsibility for National Security Planning. In the Clinton administration, he served Director of the Policy Planning Staff at the Department of State, the Special Assistant to the President and Senior Director for Democracy at the National Security Council, and consultant to the Secretary of Defense and the Under Secretary of Defense for Policy. He was nominated by the President for the position of Assistant Secretary of Defense for Democracy and Peacekeeping.
Halperin, Siegel and Weinstein gave a speech at the Carnegie Foundation in 2005 explaining their research findings.
Successive American presidents have said, particularly since the end of the Cold War, that a major goal of American foreign policy was to spread or enlarge or enhance democracy, and that our foreign policy was geared to supporting those who were struggling to establish and maintain democratic regimes.
Yet if you look at development assistance from the United States, from the international financial institutions, and even from the Europeans and the European Community, you find that there is no democracy advantage. That is, democratic countries, in fact, receive less development assistance than do non-democratic countries. You also find in the rhetoric, and even the charters, of development agencies a belief that democracy is not their business. They increasingly talk about good governance as one aspect of development, but not about democracy. The people who run USAID believe that their job is to promote development, and not democracy. That permits them to consider good-governance issues, but not to ask the fundamental question: Is this a democratic society that we want to support?
Indeed, the international financial institutions have, with one exception, charters which require them not to take account of whether a country is a democracy, or as it is referred to in the charters, its political criteria.
Underlying this policy of governments and international financial institutions is a belief about how democracy relates to development. There is a widely held view that poor countries need to delay democracy until they develop. Back when I was in college, this was the Scandinavian view of democracy, that only Scandinavian countries were capable of being democratic, and that you needed to have a solid middle class before you could contemplate democracy. The argument went—as presented in the writings of Samuel Huntington and Seymour Martin Lipset —that if a poor country became democratic, because of the pressures in a democracy to respond to the interests of the people, they would borrow too much, they would spend the money in ways that did not advance development—arguments that the current president of Mexico is making about his possible successor. These poor decisions would mean that development would not occur; and because people would then be disappointed, they would return to a dictatorship.
Therefore, the prescription was, get yourself a benign dictator—it was never quite explained how you would make sure you had a dictator that spent the money to develop the country rather than ship it off to a Swiss bank account—wait until that produces development, which produces a middle class, and then, inevitably, the middle class will demand freedom, and you will have a democratic government.
That proposition was wrong.
Siegel picked up from there. Siegel is a Senior Research Scholar at the University of Maryland’s School of Public Policy, and an expert on the political economy of democratic transitions , who has contributed articles to leading policy journals and newspapers including Foreign Affairs , Harvard International Review , Georgetown Journal for International Affairs, Los Angeles Times, Financial Times, Newsweek International, Wall Street Journal, and The International Herald Tribune. Siegel was also a high-level researcher for the CFR.
Time’s Man of the Year. Now the new Moses? The guy who’s invisible connectivity community helped bring down the Pharaoh of Egypt. Mark Zuckerberg getting credit for Egypt’s revolution? We were stunned last night as we watched Anderson Cooper and Wolf Blitzer interview the de facto leader of Egypt’s revolution, the “Google Ganhdi,” Wael…Read More
This is already old news, but here is a quick round up of Egypt headlines: • Al Jazeera English: Live Stream • Egypt’s joy as Mubarak quits (Guardian) • Mubarak Resigns, Delegates Affairs to Army (WSJ) • Why Mubarak is Out (Ratigan) • Egypt’s Mubarak Resigns, Hands Power to Military (Bloomberg) • Mubarak Steps Down,…Read More