Addison Wiggin

War between the US and China — an unpleasant thought, for sure…unless you happen to be a defense contractor. The threat of war could be sufficient to power the defense industry’s profit growth for many years.

We would not be tackling this grim topic — nor engaging in the financial market version of grave-dancing — if the suits and uniforms in Washington understood that China is merely implementing its own version of the Monroe Doctrine.

China’s Monroe Doctrine aims to keep the United States from getting closer than it is already.

If you don’t remember the Monroe Doctrine from history class, it goes like this: President James Monroe in 1823 put the European powers on notice that if they meddled anywhere in Latin America, the United States would step in to put a stop to it. It was a big “keep out of our backyard” sign.

OK, it was more subtle than that; an aging Thomas Jefferson congratulated Monroe on achieving a “cordial friendship with England.” The doctrine was, indeed, a tacit agreement between the United States and Great Britain. The US took a free ride on the Royal Navy. Its ships patrolled the waters surrounding Latin America, keeping the continental powers far from America’s doorstep.

The original Monroe Doctrine aimed to keep Europeans away. China’s Monroe Doctrine aims to keep the United States from getting closer than it is already.

“The Pacific basin has long been home to the United States’ largest trading partners, and Washington deploys more than 320,000 military personnel in the region, including 60% of its navy,” writes Conn Hallinan of the think tank Foreign Policy in Focus. “The American flag flies over bases in Japan, the Philippines, South Korea, Malaysia, Thailand, the Marshall Islands, Guam and Wake.” The US Seventh Fleet routinely sails near the Chinese coast, to the edge of the “12-mile limit” where international waters end.

Map of US Bases and Disputed Islands

No wonder Chinese leaders sense — rightly or wrongly — that they’re being encircled.

“China has made it clear that it will not tolerate the threat to its security represented by a foreign military presence at its gates when these foreign forces are engaged in activities designed to probe Chinese defenses and choreograph a way to penetrate them,” writes our acquaintance Chas Freeman, the veteran US diplomat who was President Nixon’s interpreter on his groundbreaking visit to “Red” China in 1972.

“There’s no reason to assume that China is any less serious about this than we would be if faced with similarly provocative naval and air operations along our frontiers.”

Thus are the Chinese asserting their dominion over the disputed Senkakus Islands. “China sees the islands as part of its defensive parameter,” Hallinan explains, “an understandable point of view considering the country’s history. China has been the victim of invasion and exploitation by colonial powers, including Japan, dating back to the first Opium War in 1839.”

China also insists it rightly controls a host of islands in the South China Sea — rich fishing grounds and a potential source of oil and gas. These islands, such as the Spratlys and Paracels, are also claimed by… oh, let’s run down the list: Vietnam, Malaysia, Taiwan, Brunei and the Philippines. Maybe the Kardashians too, for all we know.

In addition, China has…

  • Commissioned its first aircraft carrier
  • Developed a whiz-bang stealth fighter jet called the J-20
  • Goosed its defense spending by double-digit percentages every year for the past decade (although Beijing’s defense budget it still one-fifth the size of Washington’s).

A sensible US response would go something like this: “Hey, China’s implementing its own Monroe Doctrine. They want to be in charge in their own backyard. Meanwhile, we’re $16.4 trillion in debt. Heck, we owe $1.1 trillion of that to China. Why are we going deeper in debt to keep 60% of the Navy stationed in the Pacific basin? Maybe we should reconsider this whole ‘American lake’ thing.”

“…America’s strategic move east is aimed in practical terms at pinning down and containing China and counterbalancing China’s development.”

Instead, the US government is doubling down.

“As the war in Iraq winds down and America begins to withdraw its forces from Afghanistan, the United States stands at a pivot point,” then Secretary of State Hillary Clinton wrote in Foreign Policy’s November 2011 issue. “One of the most important tasks of American statecraft over the next decade will therefore be to lock in a substantially increased investment — diplomatic, economic, strategic and otherwise — in the Asia-Pacific region.”

In DC wonk circles, this statement of intentions has come to be known as “the pivot.”

The same month Clinton published that article — with the presumptuous title “America’s Pacific Century” — the Obama administration stationed 2,500 US troops on Australia’s northern coast for the first time. More encirclement.

“The U.S. sees a growing threat to its hegemony from China,” said a commentary from the official Xinhua News Agency. “Therefore, America’s strategic move east is aimed in practical terms at pinning down and containing China and counterbalancing China’s development.”

In Empire of Debt, we postulated the empire has a logic all its own. That logic will bring about events beyond your control. It is far better to understand those events and plan your life and your portfolio accordingly… than to allow them to blindside you and your family.

Enter the iShares Dow Jones U.S. Aerospace and Defense ETF (ITA).

ITA is up over 46% from the time we urged subscribers of Addison Wiggin’s Apogee Advisory to buy it in November 2011. Still now, the industry is positively salivating over the pivot.

In crass terms, we call our strategy “making the empire pay.” Or, if it suits you better, simply think of it as channeling some of your tax dollars back into your own pocket. If you have a problem with investing alongside the military industrial complex, have no fear. We wrote about the ethics of such investing in these pages last Tuesday.

“Name almost any investment,” we wrote, “and we can come up with a valid objection to it… and not on hippy-dippy ‘save the Earth’ or ‘fair trade’ grounds, either.”

“The military industrial complex kills people.” protests one reader, “If you can live with being an owner of a company that profits from state sponsored killing … that depends on government sanctioned and directed killing, that’s fine. I can’t. Your argument is just a way to rationalize bad behavior.”

Fair enough. Everyone will have to draw their own line on this one.

Regards,

Addison Wiggin
for The Daily Reckoning

P.S. It’s our job to simply present you with the opportunities. In today’s Daily Reckoning email edition we gave readers a specific investment opportunity with even greater potential than our ITA recommendation. We simply put it out there and let them decide what profits they were comfortable taking. If you’re not signed up for The Daily Reckoning email edition you missed out… simply click here to sign up for free, and never miss another opportunity like this one.

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Addison Wiggin

Addison Wiggin is the executive publisher of Agora Financial, LLC, a fiercely independent economic forecasting and financial research firm. He's the creator and editorial director of Agora Financial's daily 5 Min. Forecast and editorial director of The Daily Reckoning. Wiggin is the founder of Agora Entertainment, executive producer and co-writer of I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival, the 2009 Critics Choice Award for Best Documentary Feature, and was also shortlisted for a 2009 Academy Award. He is the author of the companion book of the film I.O.U.S.A.and his second edition of The Demise of the Dollar, and Why it's Even Better for Your Investments was just fully revised and updated. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs. He also co-authored international bestsellers Financial Reckoning Day and Empire of Debt with Bill Bonner.

  • Scott

    I think your analysis of a Chinese Monroe Doctrine is insightful. However, I would use this insight to warn our politicians, not to pour on the military investment. War is not fun. We should be withdrawing.

  • appleaction

    America will lose its position in Asia. sooner or later. there is no preventing it. whether we reach that reality the easy way or the hard way is up to America.

  • Rusty Fish

    I feel that Monroe can only thrive with uncle Sam and he is still alive since 1800s. Fabulous
    economic gifts and packages such as the most favoured nations term is part and parcel
    of his generosity(?). Apart from this he offers his magical umbrella that is nuclear-tipped and possesses economic functionalities as well, foc, to anyone he assesses could be instrumental to his global grip. Generosity in general sense will never be overreacted or egregiously done.
    But, debacle of the core problem is zombies thriving ubiquitously, far outstripping genuine
    human popping souls, hampering healthy demography progress. Succinct enough, the
    concurrent ecological imbalance is posing high risk of tearing the globe into pieces.

  • Chris Smallwood

    Normally I stay out of these discussions but the blatant ignorance of the author needs to be highlighted.

    Your list of contenders for the Spratlys is missing the two largest (after China), South Korea and Japan. Your also glossing over the fact that China is not a Democratic country, every other nation in that region is rightly afraid of a Chinese Hegemony being established. The US has for the most part been clandestine in it’s operations in the North, Central and South American region. China will not be so nice, their method of solving problems is much harsher and more direct.

    Also your numbers for forces in the Asian Pacific region is HORRIBLY wrong. There aren’t even 200,000 active duty deployed / stationed over seas, much less 300,000 in one region. The two main concentrations of US military are South Korea (ground) and Japan (Air and Surface). The USFK has approx 28,500 service members, USFJ has approximately 50,900 service members. 7th Fleet is part of USFJ and is permanently forward deployed to Yokosuka, Japan and compromises approximately 40,000 personal. Some of those are counted as part of USFJ the others counted as part of the base at Guam. There are less then 100,000 active duty personal stationed in the East Asian theater. Middle east is part of CENTCOM and an entirely different combatant command.

    Finally the entire reason the US is in that region is to prevent China, and to a lessor degree Russia, from becoming a military superpower. Its the result of US policy set after WWII which intends to prevent another major war from happening and the economic consequences of such a war. Essentially it’s cheaper in the long run to ensure nobody else starts a World War then for the USA to clean up after one’s already begun. And contrary to what people like yourself would have others believe, it’s worked. There hasn’t been a single World Wide conflict since the end of WWII even though nuclear weapons have advanced and proliferated to the point that relatively unstable nations like Pakistan have them.

  • Jack

    The US will not give up its presence in Asia period. Even if it means a war.

  • Jack

    Chris, in complete agreement. I am in Asia and have lived here for some years and former military. Your numbers are correct.

  • Blackanesae Ninja

    They cannot do that!!! The beast has to get the results written from day dot.

  • BLACKANEASE NINJA

    Its all clear to see that is is BULLSHIT….Of course….China blah Russia blahh And USA BOOM.

    Whats so stupid is they war but the drainblood bWatch n find out.guess what? These little people know that their time has run out and now its the end of their game so they gotta see who has got the biggest army with the best toys coz they all know that their toys are gonna get burned up weather they want them to or not. LOL!rains only have one enemy and the fools all know that. NATURE…. He,he….. THEY ALL GOT MORE THAN TORNADOES COMING TO THEM NOW.Watch n find out.guess what? These little people know that their time has run out and now its the end of their game so they gotta see who has got the biggest army with the best toys coz they all know that their toys are gonna get burned up weather they want them to or not. LOL!

  • BLACKANEASE NINJA

    you actually meant hellerica

  • Blackanease Ninja

    They actually dont have a place nor a pin.

  • voxPopuli

    “When the enemy advances, we retreat.
    When the enemy retreats, we advance.
    When the enemy rests, we harass him.
    When the enemy avoids a battle, we attack.”

    ~Mao’s advice in combating the Kuomintang, 1928. from Wikipedia

    There’s no way for US/Japan to circumvent this geopolitical drama. Damned if they do, damned if they don’t.

  • voxPopuli

    you are welcome to say anything you want here so tone down the name calling. your freedom of speech is respected here.

  • Naiwen

    because Asia doesn’t belong to the US or America.

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