Kicking the Dog

It is interesting to contemplate how far U.S. foreign policy has evolved in the few years since President Clinton appeared to engage in parodies of the movie Wag the Dog. In the Clinton era, gestures of force abroad seemed to be geared more to news management than event management. In fact, I did an informal study that showed an extraordinary correlation between the employment of force abroad and various red-letter days in Clinton’s numerous legal embarrassments. The more embarrassing the situation Clinton faced, the more likely he was to unleash an attack.

Military action, epitomized by Clinton’s semi-comic cruise missile bombardment of the Sudanese aspirin factory, seemed designed more to distract U.S. public attention from Clinton’s various legal scuffles than to achieve a coherent policy objective. Bush seems to have a different approach. Instead of “wagging the dog”, he is “kicking the dog.”

Let me explain. “Kicking the dog” also has a cinematic origin. It refers to a practice, immortalized in a Monty Python movie, of communicating unhappiness by punishing a weaker party rather than one who might be more objectively at fault. In the movie in question, members of an English household gather for meals and other family occasions only to find the matron of the family, an old dowager, loudly passing gas. As it is socially impossible to upbraid her, they respond in another way. Each time she passes gas, other family members kick the dog.

Kicking the Dog: Saddam Is the Dog

Bear this analogy in mind when you are trying to sort out the pending war to oust Saddam Hussein. Saddam is the dog. While Saddam is surely guilty of innumerable crimes, which make it desirable that he be removed as Iraqi head of state, there is scant evidence of Iraq backing terrorism. Part of the reason that Bush’s many bellicose statements about ousting Saddam have not gained wider acceptance is the fact that it is impossible for him to articulate the actual good that his war would achieve if successful. Therefore, the real logic of Bush’s belligerence against Saddam has been little understood. Bush may be attacking Iraq, but the real target is Saudi Arabia.

Think about it: Saddam may have welcomed an al Qaeda operative or two in Baghdad. But the main reservoir of fanaticism that gave rise to and sustains al Qaeda is Saudi Arabia. The chief patron of the al Qaeda terrorist network is Osama bin Laden, a wealthy Saudi fanatic. The great preponderance of suicide bombers (15 of 19) who attacked the United States on Sept. 11 were Saudi nationals. And the major financial support for the terrorist networks, in addition to the millions lavished on terrorism by bin Laden himself, comes from six other wealthy Saudis.

If stopping terrorism were your objective, and you really meant it, as Bush seems to do, it might be important to cut off the supply of weapons of mass destruction accumulating in unstable hands in Iraq. But it could be equally important to turn off the incubator that is breeding more terrorists, as well as to cut off the flow of funds that sustains terrorist enterprises. This is where Bush is way ahead of his critics.

When you start thinking in those terms, your attention automatically gravitates south of the Iraqi border to Saudi Arabia, which is the main incubator of terrorists. It is the vast Saudi oil wealth, concentrated in the hands of often-pious devotees of the intolerant Wahhabi sect of Sunni Muslims, which repeatedly leaks into the hands of terrorists, many of whom are themselves Saudis. And it is not to be forgotten that official Saudi support for fundamentalist schools in Pakistan and elsewhere in the Muslim world has done much to stoke the fires of religious fanaticism.

Kicking the Dog: Spreading Radical Islam

Indeed, as The Wall Street Journal reported, the Saudis have financed efforts to spread radical Islam through prison ministries in the United States. (See: “Captive Audience: How a Chaplain Spread Extremism to an Inmate Flock”; “Radical New York Imam Chose Clerics for State Prisons”; “Praise for 9/11 ‘Martyrs’ Saudi Arabia’s Helping Hand” by Paul M. Barrett, Feb. 5, 2003.) The story details how the Saudi government financially backed efforts led by Warith Umar, formerly known as Wallace 10X, formerly known as Wallace Gene Marks, to turn imprisoned black Americans into Islamic terrorists.

The major factor that contributes to the cauldron of steaming lunacy in which characters like Osama bin Laden bubble to the surface is the almost uniformly backward nature of Arab society. Throughout the Middle East, most Arab cultures are essentially medieval in their orientation. Indeed, in many cases, they are more backward than they were in medieval times, when Arab scientists were at the forefront of developments in astronomy, mathematics, chemistry and technology.

At that time, Arab thinkers like Ibn Khaldun (1332-1406) were centuries ahead of their counterparts in the West. Indeed, many modern scholars consider al Mugaddimah, Khaldun’s prologue to history, to be a more sophisticated and modern treatment of the issues raised in Niccolo Machiavelli’s The Prince, written a century later. Unlike Machiavelli, or almost any other thinker in early modern Christendom, Khaldun based his analysis of power politics on cultural, sociological, economic and psychological factors, and not just the moral character of the ruler.

I don’t know whether Bush has read Ibn Khaldun. I rather doubt it. He may have read Machiavelli. As for Saddam, he certainly acts as though he were a student of Machiavelli. Be that as it may, it appears to me that Bush is basing his campaign against terrorism, not just on the effort to turf out one corrupt prince, Saddam Hussein. Rather, Bush appears to be seeking to undermine the whole cultural, sociological, economic and psychological foundation of terrorism.

Ironically, while Saddam postures, lies and maneuvers with the alacrity of Machiavelli’s Prince, Bush seems intent upon striking at the deeper roots of terrorism, as Ibn Khaldun would have advised.

Regards,

James Davidson
For the Daily Reckoning
March 4, 2003

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“I know you have been right,” a former Daily Reckoning sufferer admitted recently, “but I can’t bear to read your letters. You’re just too depressing…”

Okay…point taken. So, today, nothing but good news. Let’s begin:

March 12th. Mark your calendar. That’s the day the killing is scheduled to begin, says our resident geo-political strategist, Dan Denning.

Key figures in the Bush administration are said to be canceling trips for March 12, Dan tells us. And now, a report in the French press says that President Chirac has cancelled a mid-month jaunt, too.

Now that’s good news, isn’t it? The world will be such a better place after all this loose talk of ‘regime change’ and ‘democracy’ stops and the bombs start to fall.

Everybody knows the war will be short and sweet…and everybody knows the economy and the stock market will boom after the war is over – just like they did after the last war against Saddam.

Of course, everybody loves the beginning of a war…but not as much as they love the end of it. Because, between beginning and end, things tend to go wrong. But in this case, the arsenal on the one side is so magnificent and on the other so puny that people expect nothing but good luck.

Ah…that is where the gods of War and Fortune play their tricks. With a little luck, things go wrong enough that people come to their senses, go home and mind their own business. If you’re really unlucky, on the other hand, the war is a smashing success…and the stock market rises sharply. Then, the warmongers think they are geniuses and begin looking for the next target…and keep at it until you are all roasting in hell.

Hell is on our minds this morning, here at the Daily Reckoning office. Not that we’ve done anything wrong, personally, in the last 24-hours. We don’t even know if hell exists (though we’ve seen some pretty bad neighborhoods in Northwest Baltimore). But there are some things you are better off believing – even if you have no evidence. Who knows…maybe you could murder someone and get away with it. Maybe the world would be a better place if you did. But it is probably the fear of retribution, either in this life or the next, which keeps most people honest.

Maybe the war will go well. Maybe Saddam will get struck by a bomb so smart it doesn’t even smudge his uniform. And maybe, Iraq will immediately transform itself; McDonalds will open franchises in Baghdad…people will open brokerage accounts…SUVs will fill the streets. Maybe Iraqis will even begin lending the U.S. money so Americans can continue living beyond their means….

…but maybe not.

And maybe America will muddle through its economic slump without a calamity. Warren Buffett warns in FORTUNE magazine that derivatives are “financial weapons of mass destruction” that could cause a “mega-catastrophe”. But maybe it won’t come to that. And maybe the dollar won’t crash. And maybe stocks won’t go down. And maybe the consumer will continue spending more and more forever.

Still, it’s probably best to think that what might go wrong will go wrong. Then, you can be pleasantly surprised when things turn out better than you expected.

Our long-held view is that the American economy is going to hell in a shopping cart. The comic delusion – that you can spend your way to prosperity – must be approaching its punch line. If not, well…so much the better.

But even America’s trade deficit is good news today – for Asian stocks.

“While U.S. economic policy makers will continue to stimulate credit growth and consumption in the U.S by increasing the indebtedness of households,” Marc Faber explains, “the wealth transfer to Asia via the U.S. trade and current account deficit will continue to stimulate industrial production in Asia and other emerging economies…

“To an unbiased observer, it would seem almost that U.S. economic policies are designed to impoverish the United States and to enrich Asia…”

Faber recommends a few funds that could benefit: the MSDW Asia Pacific Fund, the India Fund, the China Fund, the Apollo Asia Fund, and the Thai Focused Equity Fund.

And now over to Eric Fry, our man in Manhattan:

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Eric Fry, reporting from New York…

– Mr. Market can’t seem to shake his “ennui”. It’s not that anything troubles him so much, it’s just that nothing excites him either, not even the arrest of al-Qaeda bad guy, Khalid Shaikh Mohammed (whose mugshot, by the way, looks eerily like Jim Belushi in Animal House). News of the “alleged” terrorist’s arrest sparked stock market rallies in Asia and Europe prior to the start of New York trading yesterday. The Dow followed along by rallying about 75 points in the early going. But by day’s end, the Dow’s advance withered to become a 54-point loss. The Nasdaq skidded 1.3% to 1,320. Gold for April delivery also drifted lower, losing $1.00 to $349.30 an ounce.

– Mr. Market’s ennui is hardly surprising, given the perfectly bland macroeconomic reports that have been crossing the newswires lately. Yesterday, the Institute for Supply Management’s index of manufacturing activity posted an inoffensive reading of 50.5 for February. In theory, a number above 50 signals economic expansion. Even so, the latest reading is somewhat less expansionary than January’s reading of 53.9.

– Meanwhile, consumer spending dipped 0.3 percent in January…and that’s not very exciting either. For the second time in the past 14 months, consumers cut back on spending. Suddenly saving has become the socio-economic fashion of the day. What could be more boring than that?

– The national savings rate continues to climb, according to the Bureau of Economic Analysis. Savings as a percentage of disposable personal income jumped to 4.3% last month from 3.9% in December. “The pickup in savings reflects households trying to compensate for three consecutive annual declines in net worth,” says Northern Trust economist, Asha Bangalore. American households have their work cut out for them, as $8 trillion of stock market wealth has vanished over the last three years.

– One big reason savings jumped in January was that consumers curtailed spending on durable goods, especially autos. Purchases of durable goods tumbled 5.7% in January, the biggest drop in 13 years. Apparently, the heavy sales incentives offered by car manufacturers did not sufficiently incentivize tapped-out consumers to go even further into debt. Despite offering average rebates of $3,000 per vehicle, U.S. car sales dropped 1.9% in January. The trend continues…GM admitted yesterday that its U.S. vehicle sales fell 19% in February from year-ago levels.

– Most of the big automakers are bracing for another rugged year. “General Motors Corp., Renault SA and DaimlerChrysler AG executives all expect the European and North American markets to shrink for a second year,” Bloomberg reports. Ford expects industry-wide demand in the U.S. this year to fall 2% to 16.5 million vehicles.

– Ford’s estimate may prove to be wildly optimistic if personal income trends don’t improve soon. It’s worth noting that January’s 0.3% increase in personal income was not nearly as impressive as the headline number might suggest. That’s because most of the increase derived from a big boost in government wages. Meanwhile, out in the private sector, “private wage and salary disbursements” actually FELL $0.8 billion in January, compared to an increase of $9.9 billion in December. That’s not an encouraging trend.

– Saving money is not only boring; it’s also hard work. Suing is a much easier way to build up a nest egg, which partly explains the current bull market in securities litigation.

– Dow Jones News reports: “Investors filed a record number of arbitration requests seeking damages from Wall Street in 2002, according to statistics released by the National Association of Securities Dealers Dispute Resolution. It was the second consecutive year that the number of cases hit a record…A total of 7,704 new arbitration cases were filed with the organization in 2002 – 11 percent higher than 2001 and 39 percent higher than in 2000.”

– The wages of successful litigation also continue to increase. “In 2002, damages were awarded totaling $139 million, $23 million of which was for punitive damages. In 2001, the figures were $97 million and $15 million, respectively.”

– Remember, however, that not just anyone can successfully sue a brokerage firm. You need to have a poor-to-mediocre case and an excellent attorney.

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Back in Paris…

*** Warren Buffett describes the problem with derivatives:

“I believe…that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one another. The troubles of one could quickly infect the others. On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.”

*** The number of investment clubs is down from the peak – but not much. There were 37,129 registered clubs in 1998. Now there are 13.5% fewer. Hardly enough of a decline to signal the bottom of a bear market. Stocks have a long way to go – down.

*** Long-term Treasury bonds hit an all-time high yesterday. Bond investors are less worried about inflation than they are about a deflationary slump.

*** More good news: Gold sank below $350 yesterday. Buy.