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Economic Warfare

By Bob Wood

One of the more revolting people making a living by offering economic and investing advice did his best last week to show how little he works at bringing a functioning mind to his work. Larry Kudlow, who last year called for a return of The Sedition Act to stifle dissent at what many Americans now call a “failed presidency,” spent considerable air time calling for war with China.

This same guy in early 2000 advised loading up on technology stocks as the Nasdaq moved above the 5,000 level. Then, with conviction, he prophesied that the index would reach 10,000 and the Dow, the 35,000 level, by 2010. That climb, he claimed, would give Dow investors an average annual return of about 33% and Nasdaq investors, a 46% average annual gain, if they take action now! Well, we have only four more years to go!

Or you could have listened to Jim Cramer instead, quoted as saying on February 10, 2000, “Enron is certainly for real.’’ After recent executive convictions on multiple charges including fraud, Enron seems convincingly unreal.

But Kudlow is firmly planted among the pro-war crowd who first called for war in Afghanistan, Iraq and North Korea and now add Syria and China to the list of countries the U.S. should bomb for their own good The purpose, of course, is the pursuit of freedom for all or, at least, for those lucky enough to survive efforts to free them from oppression.

Kudlow the economist seems to believe that wars are good for the economy of the invading country. Hasn’t that theory been proven wrong, since we are still paying interest costs on borrowing for past wars? The “National Review Online” quotes Kudlow on June 26, 2002, calling for war with the rationale that “the shock therapy of decisive war will elevate the stock market by a couple thousand points.” That a war like could well lower tens of thousands of innocent people to their early graves seemed a justifiable cost!

And, have you seen revealed in recently released archived papers that Henry Kissinger told the Chinese government that it was fine for the Communists to take over Vietnam if they allowed enough time for our forces to leave? That move assured no appearance of our having lost the war. But wasn’t that war an all-out effort to stop the spread of Communism?

Now, the call for war with China is ridiculous on several levels, with the most obvious that China is lending us money needed to fight the two wars we are losing now. Do you think the Chinese would fund our war against them? So where would that money come from? Japan? OPEC countries?

If attacked, what do you think the Chinese response would be? A preview of that response is available in the book Unrestricted Warfare, written in 1999 by a small collection of China’s military officers. And anyone who read this column in May 2005, may remember my recounting how such a war would be a bigger U.S. disaster than the war in Vietnam or the ongoing debacle in Iraq, which is led by the same people who did their best to avoid fighting then. I’m remembering Dick Cheney’s five deferments and Karl Rove’s admission that dying in a rice paddy was not high on his list of ambitions.

A war with China, fought using conventional means, would surely be as destructive as any in history. The combined military firepower of the combatants is unsurpassed in history. The Chinese know this full well and seem to exhibit no ambitions to invade another country to capture its natural resources or install a puppet government that would allow stealing its wealth under the guise of bringing democracy, freedom and modernization. But they would have no choice but to defend themselves if people like Kudlow or other war mongers at The Heritage Institute, the American Enterprise Institute or the Weekly Standard make progress in their new push for war.

Of course, these war lovers, too afraid to fight themselves, are only too eager to send someone else, though apparently not their own sons and daughters, to “defend freedom” and whatever else must be defended, such as America’s position as the world’s only true superpower. The U.S. enjoyed the “uni-polar world” created with the fall of the USSR, an advantage worth fighting for, and now China represents our biggest threat to domination and access to needed resources like oil.

According to the pro-war crowd mentioned above, not just China should be beaten into submission. Trumpeting calls for war against Iran, Syria and Venezuela are also heard, as Bush 43 seems eager to shore his place in history as a war president, perhaps to help us forget his aversion to real fighting when his number was called. I don’t know about you, but I think his kids would look great in uniform. And his nephew George, tall strapping guy that he is, would look better than Elvis in the uniform. Sign that kid up!

Beyond any doubt, I believe that war with China or increased tensions with Russia or even Iran would be the last straw for America. My premise has much to do with how these countries would choose to fight in their own defense. And while Alan Greenspan seemed at a loss to explain why long term bonds did not fall in price and rise in yields after he raised interest rates several times, his “conundrum” had a good explanation. The buyers of those bonds might have had an agenda.

Primarily the Chinese were stockpiling those bonds, yielding less than the true rate of U.S. inflation. Now, why would they buy bonds that are virtually guaranteed to lose money? Seems odd, doesn’t it? What value would those bonds have besides their paltry returns? And other countries appearing on the hate list of conservative groups and spokesmen like Kudlow have weapons of their own, and, in fact, have used them in the past with great effectiveness. As I wrote in May 2005:

“An early version of post-modern warfare occurred in the early 1970s, when the Saudis, apparently unhappy with U.S. support for Israel during the Yom Kippur War, used their most powerful weapon—oil. The Arab Oil Embargo slowed oil shipments to the U.S., causing an economic recession that prompted our leaders to consider invading the Middle East to take possession of major oil fields. The results of the embargo were that serious!

Over time, the U.S. was able to mend fences with the Saudis, but have today’s leaders in Iran, Venezuela or Russia forgotten the power of interrupting our energy supply more than 30 years ago? Hugo Chavez has already mentioned curtailing oil shipments to the U.S. to dissuade future attempts to kill or depose him. Or maybe these countries would decide to conduct simultaneous “routine maintenance” on their energy infrastructures, knowing that tighter supplies lead to higher prices and netting the same income for less work?

It’s no secret that Russia’s Putin is irritated about the many military bases the U.S. intends to build on his borders and the pro-Western governments appearing in former parts of the old USSR. Considering how much oil Russian supplies to the world, he, too, may be thinking about an embargo. And those who believe that Ronald Reagan was responsible for the downfall of the USSR should revisit the Saudis’ decision to flood the market with oil at that time. This challenge, showing competitors who would win the oil price war, was more powerful than Reagan’s bluster. The USSR suffered a nasty reduction in income from oil sales, thus speeding its downfall.

Fast forward to the Iranians becoming less comfortable with the U.S. military establishing permanent bases on either side of them. Might they decide to use oil as a weapon to slow us? The “Axis of Evil” references most likely resonate there still.

Now rewind to China again. A few years ago, the Chinese might have bristled at our President’s reference to China as a “strategic competitor.” Today, they may be less willing to forgive negative U.S. reaction to the Euro Zone’s intention to sell them military equipment, as well as our aggressive talk about reacting to their hostile intentions against Taiwan. Does U.S. foreign policy often involve telling other countries what they must do to keep us happy? Might that get old soon?

The U.S. and China also face intensifying competition for energy resources. How many wars in the past 100 years have started because of access to energy supplies? Should the U.S. just boot Chinese interests from places like Canada, Venezuela and the Middle East, which have supplied our oil and gas in the past? How could an inferior Chinese army fend off the challenge?

In our hurry to spend more than we earn or produce, this nation has incurred massive debt with countries such as China and energy-rich countries like Iran, Russia and Venezuela. Our balance of trade now tips lower at a historically negative pace, nearing a $750 billion deficit for the current year. And that means other countries hold hoards of U.S. dollars, bonds and stocks, which, they have admitted lately, represent a dangerously high level of concentration.

Could representatives of a loosely tied coalition of countries, which feel threatened by U.S. militarism, simply sit at their computers, hitting the sell button until their index fingers ache? Foreigners now hold close to $3 trillion of U.S. debt, $1.5 trillion of our common stocks and who knows how many dollars. If threatened, how hard would they find “diversifying their holdings of foreign reserves,” as prudent policy would dictate?

If you think recent alliances of China, Russia, Iran, India and South American countries Brazil and Venezuela are strictly for commercial purposes, watch for signs that they also have defensive reasons. And if an economic war would begin, those countries hold all the serious ammunition. Oil and gas could be withheld or sold to others. Dollars, bonds and common stocks could be sold hurriedly, sending shock waves through our economy and generating dissent among our leaders, asking who maneuvered us into this weak and indefensible situation.

If you were a foreign leader feeling threatened by the U.S.— and that list is growing longer—what would you do? You would do whatever you could, and other countries could harm us now if they felt that they had no other choice. And while they sat in their big chairs, hitting the sell button over and over again, what could we do about it?

Such a coalition of sellers would not portend well for the U.S. stock or bond market, which already sells at historically high levels of valuation and historically low levels of yield. Perhaps we should review our holdings now to prepare for any necessary selling—before their selling begins in earnest.’’

Here we are, a year later, and not much has changed, aside from how much more weaponry our potential enemies have accumulated in terms of our dollars, bonds and stocks. Threatening war against those with economic weapons is sure to be another loss for America, and with the most incompetent administration in modern times running the show in Washington, its likelihood of launching another stupid war should not be neglected in your portfolio decisions.

Have a great week.



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