War with Iran? I don't believe it.

The press seems to assume war with Iran is more and more certain. At least the western press. My father, who travels widely, tells me that virtually all Israelis now believe war with Iran is now inevitable. The prevailing assumptions are outlined in this gloomy op-ed for the New York Times:

Israel will almost surely attack Iran’s nuclear sites in the next four to seven months — and the leaders in Washington and even Tehran should hope that the attack will be successful enough to cause at least a significant delay in the Iranian production schedule, if not complete destruction, of that country’s nuclear program. Because if the attack fails, the Middle East will almost certainly face a nuclear war — either through a subsequent pre-emptive Israeli nuclear strike or a nuclear exchange shortly after Iran gets the bomb.
—Benny Morris

I guess this puts me in the optimist camp for a change. I think Morris is missing something (maybe everything would be more accurate). Israel can not hope to achieve anything by launching a unilateral war against Iran. This is because Iran is now backed by both China and Russia (and, discretely, by Japan). China and Japan depend on Iran for energy supplies. Russia is building much of Iran's new infrastructure, including military, and has many billions of rubles worth of business deals there. Iran is to Russia as Iraq is to America: Russia is fortifying Iran to secure their oil and gas supplies, much as America installed massive military bases in Iraq to secure their oil and gas. Russia has supplied Iran with Sunburn cruise missiles, which are a generation more advanced than US and Israeli cruise missiles, giving them tactical superiority. They are capable of evasive maneuvers, making them hard to defend against. These missile installations look down on the straits of Hormuz, bottleneck to the Persian Gulf oil shipments.

Of course, Iran can't win on the basis of better missiles. Over all, the Israeli and American military is far superior to Iran's. The real issue is not tactical, but strategic. Israel is backed by the USA and England, and Iran is backed by Russia and China. If a conflict starts, unless it turns into a short and quick victory for one side (unlikely), the side that will prevail will be the side with access to the most energy and capital. I'm not saying that Russia or China would attack the USA or England. Rather that those powers would employ geopolitical leverage to prevent Israel from destroying Iran, and vital Russian interests there, i.e. the oil and gas fields.

The USA and England are both on the brink of outright insolvency, and the USA is also dependent on imported energy. They are in no position to back Israel in a war. Wars are insanely expensive. England is now a net importer of energy, and their domestic supplies are in rapid depletion. Israel purchases its oil imports on the London and Russian markets. They depend on American and UK lines of credit.

Russia is not only self sufficient in energy, but can, and has demonstrated its willingness, to cut off energy from its export markets. China can do the same with capital, by simply selling part of its war chest of US Treasury bonds. China and Russia's superiority is so overwhelming that they can prevent a war from happening.

And that, I believe, is optimistic. If Iran had the bomb, I don't think Iran would nuke Israel and assume a retaliatory strike. In fact I think it is astonishing that Israel is threatening exactly that. Don't tell me that Iran is more crazy than Israel. They are both crazy. I think saner heads, i.e. Russian and Chinese, will prevail.

Schumer tells the Saudis.. something he'll apologize for

Senator Charles Schumer is trying to threaten OPEC, and Saudi Arabia in particular, to get them to sell America cheaper oil.

“The Saudis have to understand this is a two-way street. We provide them weapons, our troops provide them protection, and then they rake us over the coals when it comes to oil.”— Schumer

Wow. Schumer is threatening the Arabian oil producers. The whole thing about protecting them with our weapons and troops sounds just like a mafia shakedown, with the thing about our troops being already there. Amazing. Doesn't he know that most Saudis hate the fact that US military “protects” them? Does it occur to him that Saudi Arabia could trade American protection for Chinese and Russian protection?

Doesn't he know who recently bailed out America's investment banking system? Among the participants of Citicorp's private offering of convertible preferred securities are the Kuwait Investment Authority, and His Royal Highness Prince Al-Waleed bin Talal bin Abdul Aziz Al Saud (see Citi's own press release). Mr. Al-Waleed bin Talal is a member of the Saudi royal family, and one of the world's most successful investors.

The senator from New York, of all people, should know what's going on on wall street. He should know who now controls the huge money center banks. The large investment banks' recent preferred stock offerings were no ordinary stock offerings. These were last ditch efforts to re-capitalize America's banking infrastructure. If these offerings failed there would have been a global financial collapse. So, know that the rescue money from the Arabs did not come without conditions, far on top of the 7% coupon the preferred shares pay. The first condition would be “we control the oil now”.

An article that expands on Schumer's assumption that America can still prevail as a superpower, and gives a somewhat more logical and reasoned framework, was published last week by Chile based market analyst Clive Maund: Powerful Bullmarket In Us Stocks Looms As The Us Prepares For Global Hegemony.... Maund basically says that America now has control of Iraqi oil (because of it's permanent military installations), and, in addition, will soon secure Iran:

“The oil reserves contained within Iraq are gigantic, and thus its acquisition was a major economic and security leap forward for the United States. In addition its central position within the region and the earlier acquisition of Afghanistan make the eventual appropriation of oil-rich Iran an almost foregone conclusion... At present the US is only militarily the greatest power on earth, but in a few years it looks set to assume comprehensive hegemony of the planet, as the massive oil revenues from the spoils of the Mid-East campaigns flow in and correct the careening deficits. China will then comply with US demands or the oil tap will be swiveled in the off direction. Russia, currently blessed by an abundant supply of oil and other natural resources, should do well, but will be surrounded and eventually forced into compliance as its resources dwindle and it becomes increasingly isolated. Britain, as the 1st officer of the US in its wars of acquisition, will enjoy a privileged place at the table in an increasingly resource starved world. Israel will look on with quiet satisfaction at all of this.”

This is a fascinating thesis, and one that I disagree with. America had global hegemony. That ended last year when it became apparent that the USA is essentially insolvent. We simply don't have the time to get out of this: a domestic shitstorm of housing collapse, energy shortage and capital crises are slamming us concurrently. Far from expanding our influence in the Persian Gulf, I think we'll be forced to withdraw. Jim Willie has made a prediction on how the showdown would occur: a demonstration of Iranian firepower via a Russian Sunburn cruise missile.

“The Iran wild card cannot be dismissed. A casual observer might believe the United States Military eagerly desires an incident, even with loss of US soldier lives, provided a cause for war is achieved with Iran, for some greater good not easily understood. So far Tehran has not bitten the bait. In the wings is Russia, quietly in control of European energy supply and eyeing its odd bedfellows among the ruling mullahs. Hidden in the hills and along the shore of the Persian Gulf are oodles of Sunburn missiles, supplied by Russia, installed by Iran, aimed at US warships. The Sunburn is one generation ahead of the Tomahawk Cruise missile in the US arsenal, capable of evasive maneuvers. ”

A sunk aircraft carrier would be a convincing demonstration of power. Naturally such a blow would not go unanswered. Iran would suffer some terrible attack with probably far more loss of life. But the American generals know, as do the Iranian, Russian, and Chinese generals, that America can not prevail. With a depleted military, and without the capital to re-fit and re-build, America can no longer use its military to seize the remaining great oil prizes. Weapons and ideology can start wars, but only fuel and capital can win them.

Fortunately it need not come to warfare. The Chinese could use discreet diplomatic and financial threats to steer us away from the path of global hegemony, even though that is America's natural default stance. We'll just have to spend the money on something boring, like building public transportation. We should mention it to Schumer one of these days. And next time New York needs a little cash he might be saying “sorry!” to His Royal Highness Prince Al-Waleed bin Talal bin Abdul Aziz Al Saud.

globalization, the end game

In the 1990s, the era of permanent global “free trade”, so called, or globalization, was ushered in. Local production workers everywhere, that is in America and abroad, hated it, and protested. Economists loved it because it was more “efficient”. Global trade's most charismatic promoter was probably Bill Clinton. I don't know where, but I think I read some theorist saying that globalization was a permanent beneficial change to the world's economic system. Maybe it was the same train of logic that led philosopher Francis Fukuyama to declare permanent prosperity and peace for the globe in the form of the “end of history”. History, it turns out, is now proceeding to change things at an accelerating rate. And the era of globalization will end a lot sooner than those ideolouges thought. Three powerful trends will seem to conspire to break up the world trade routes (despite the fact that a lot of wealth is created for a few powerful rich magnates and they will try to preserve this system at all costs):

• Nationalization of Resources
• Protectionism
• Capital Controls

In the first place, we are witnessing an era of resource nationalization. Globalization was predicated on the assumption of efficient worldwide commodity markets, and such markets only function with a relative abundance of commodities. One of the curious and most exploitive of the tenants of the GATT talks (so viscously protested in Seattle in 1999) was the idea that all signatory nations had to agree to produce, and sell in open markets, any natural resources they possessed. Efficient production usually occured alongside the environmental degradation of the less wealthy nation. But that is now changing. Nations such as Bolivia, Russia, etc, are finding that they do have to power to regulate and nationalize oil, gas, and mining production.

There have been no shortages of commodities to slow down global economies for a long time, and some economists seem to think shortages are so obsolete they it couldn't possibly occur in the 21st Century. But the trend is for commodities of all kinds to rise in price and value. Scarcity of resources is the coming dynamic and free markets do not love scarcity. This will not just slow down the global trade in the resources themselves, but also affect trade in such manufactured goods which require non-local resources. China, for example, will be limited in its manufacturing by how much energy and copper it can import, now that it is no longer self sufficient. In time even American precious metal mining and energy production will need to be nationalized, if only to keep them out of the control of our creditors.

The second anti-global-trade factor is a slowly building force in the USA. It is simply the demand by citizens to support their domestic production. Protectionism. Now that the the American economy is obviously stumbling and there will be layoffs, and people losing their homes due to mortgage defaults, the government will need to do everything it can to try and keep as many people employed as possible. Even if it is not economically efficient. Social unrest will be a bigger threat than loss of cheap imports. This is the same force that was protesting against globalization in Seattle, but now they will have a much more sympathetic ear from congress. We will very likely see import quotas, tariffs and other abrogations of our trade treaty obligations.

The third trend will hit the global economy with terrible shock waves in the next two years: capital controls. Why economists assume that currency will remain freely exchangeable is baffling to me. The world now runs on fiat currency managed by central banks. This system was created to finance the gigantic economic expansions of the past half century. It is now teetering on the brink of collapse. The huge structure of artifice convinced people that paper money was as good as gold, and it was very effective in the times of plenty that the world has seen. Now that almost all central banks (Switzerland is the sole exception) are inflating their money supply at double digit rates, and the US dollar is in a death spiral, the system is doomed. The plunging dollar has created a global state of emergency: pretty much everything traded internationally is priced in dollars. If no one knows what, if anything, a dollar is worth, how do they know what anything else is worth?

Nations holding US treasury bills will be forced to sell their dollars and no county, including America, will be happy to take them in. Like destitute refugees, no nation will want to give the dollar a home. I have heard people say that because the dollar is the world's reserve currency, and no other currency will serve, it has to stay. I don't buy it. Within a very few years all fiat currency (unbacked by gold or other assets) will not be welcome in international trade. The euro can not save fiat currency either: the European Central Bank is racing America's Fed to inflate concurrently with the dollar. BTW, If you think you will always be able to own stock in that Australian mining corporation.. well I'm saying maybe not, unless you are in Australia. Soon, capital will have to stay closer to home.

This is not to say Saudi Arabia, China and other exporting nations will no longer export oil or goods. They can't do much else after all. Trade will be negotiated between nations under secret terms in guilded state department halls and embassies instead of open electronic trading bourses. Agreements will be made with armies and navies in the background, always the subtle threat of war (historically, most wars have been fought for control of resources and trade routes). Terms of trade will consist of exchanges of hard assets, military services, manufactured goods, or precious metal bullion. Barter between nations is the future of trade, and will be made to secure strategic advantage, not the best price. No nation will want to trade with its strategic rival, except under threat of war or other coercion.