Welcome to the Warfare State

Strategic Investment’s Daniel Denning on the real effect of the War on Terror…

"The will of man is not shattered, but softened, bent, and guided, men are seldom forced to act, but the are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd."

– Alexis de Tocqueville,
Democracy in America

In the Halls of Justice, he likes to be called "General." No article . Just "General," like a Brazilian soccer player or an American pop-star. But there’s nothing funny about John Aschcroft’s War, or, I should say, the War in which he’s a General on the domestic front.

Ashcroft, whose Department of Justice, came under fire this week for reporting 775 missing or stolen weapons and 400 missing laptops, is organizing the domestic front in the War on Terror. Over dinner Sunday with some old friends who still live and work in D.C, ( which I grudgingly admit to being a former resident of) we discussed not only Ashcroft’s favorite nickname for himself, but the growing warlike nature of America, and what it might mean for stock values and the economy.

The War on Terror is subtly but decisively changing America into what I call a Warfare State. You can pick it up from looking at our public dialog on any number of political issues, the War on Drugs, the War on Poverty, the War on Tax Evasion, even the new War on "Big Fat." Reasonable civic dialogue is no longer possible in the New America. You are either with us, or you ARE the enemy.

The emergence of the Warfare State will have two main consequences for you. One, as an investor, you must now be conscious that the main force driving investment values is not the growth of profitable companies developing better products at lower prices for American consumers. It turns out that this model-technology-driven innovation in the service of better and cheaper consumer goods-was an historical anomaly. It was the famous "Peace Dividend."

For most of the 20th century, the American economy poured its resources, via government spending and private R&D, into developing new technologies to win the space race and the Cold War. Economic production, at least from a macro- strategic level, was geared toward winning an ideological battle. Then our ideological foes collapsed. The Berlin Wall fell. George Gilder rose up. And for a brief moment in history, we believed we were in world where perfectly efficient markets and perfect competition would seamlessly allocate capital to those companies making the world a better place for you and me. Lower prices and better DVD players for all.

Alas, this was more a vision than a reality. And now, as the percentage of GDP which we spend on defense spending begins to climb its way back to Cold War levels, we’re again seeing a shift in the focus of our economic policy makers. Instead of cheap consumer electronics, our national goals will now be developing more sophisticated tools to spy on each other in every facet of our lives, from cameras in public places, to identity cards, to "virtual" government wiretapping of our on-line communications, our medical records, and our financial transactions.

What a tragic irony. Technology didn’t make government less powerful. It made it more powerful. And thus Americans are in danger of becoming less free. The government is doing what it’s always done, using technology to steadily extend it’s reach into the private lives and personal matters of Americans-all in the name of a War that is permanent. Thus the Warfare State.

Acknowledging the existence of the Warfare State is the first key to surviving it as in investor. The United States spends close to $300 billion a year on defense. That number figures to climb in the next ten years. At the height of the Cold War, America spent 6% of GDP on defense. Today it’s 3%. Double that figure and you get an annual defense budget of nearly $600 billion dollars. To put that in perspective that’s nearly three times the total GDP of the Russian Federation, equal to Canadian GDP, and half the GDP of France.

There are only four major U.S defense conglomerates left, Lockheed Martin, Northrop Grumman, Boeing, and Raytheon. They are all sure to get a large chunk of new spending. But there will be thousands of other smaller companies who get a chunk of defense contracts. Tracking those companies-what they do and how their niche technologies fit into the Warfare State-will make some investors incredibly wealthy. It’s a new kind of "Blood in the Streets" investing which we’re already doing at Strategic Investment.

The second major consequence of the warfare state is more ominous. Getting enormously rich is your only effective deterrent against a more powerful government. Fighting for your liberties will be much harder.

No self-respecting lover of liberty could be happy with a scenario where the government gets more powerful, more intrusive, and generally enjoys popular support all the while. The world Orwellian doesn’t do justice to a situation in which millions of allegedly free people willingly give up their rights to privacy and to great wealth.

And on the privacy front, I’m sorry to say there’s little you can do to stand in the way of the Warfare State. The anti-terrorist Act of 1996 gives the Attorney General the right to use the armed forces against the civilian population and also selectively allows the government to suspend the right of habeas corpus, something Lincoln found useful in jailing Americans during the Civil War. Former President Clinton probably spoke for a lot of non-thinking Americans when he said, as he signed the bill into law, "There is nothing patriotic about pretending that you can love your country but despise your government."

Ashcroft, no ideological bedfellow of Clinton’s, sounded astonishingly the same when testifying in front of Congress about the Patriot Act, which Congress passed last October he said that those "who scare peace-loving people with phantoms of lost liberty. . . .Your tactics only aid terrorists, for they erode our national unity and diminish our resolve. They give ammunition to America’s enemies."

The Clinton-Ashcroft-Bush axis seems to be saying this: in the War against terrorism, you are either with the government, or you are un-American. No doubt the FBI’s carnivore system will systematically search this very e- mail for anti-American sentiment. And if you should choose to forward this to your friends, be warned, you’re probably being watched, too. All in the name of freedom, of course.

What’s most dangerous about the emergence of the warfare state is that in the spirit of being "team players," Americans tolerate steady incursions into their own decision making. Here’s just a minor example. I went to see the new Mel Gibson movie "Signs" the other night. Before the show, an usher came down in front of the audience and asked for quiet. He then proceeded to lecture us on cell phone etiquette, conversational etiquette, and how we should all scoot to the middle of the row to clear extra seats.

Don’t get me wrong. I’m all for good movie etiquette. But what astonished me was that he not only suggested these things, but then threatened to kick anyone out who failed to comply. This final ultimatum was met with enthusiastic applause by the sheepish audience.

Self-sufficient people tell their neighbors to shut up. They don’t need a bully to do it for them. We are slowly in the process of transferring all responsibility for mediating our civil affairs to the state. We are becoming, as Michael Ledeen says in his book Tocqueville on American Character, "meekly subservient to an enlarged bureaucratic power: the corruption of our character, and the emergence of a vast welfare state that manages all the details of our lives,"-including how we behave at the picture show.

We have gone, since Ledeen wrote his book, from the welfare state to the Warfare State. But his warning, and Tocqueville’s, are more important now than ever before. We are granting an enormous power to our government, one which it will not willingly give back. Of that power, Tocqueville says:

That power is absolute, minute, regular, provident, and mild. It would be like the authority of a parent if, like that authority, its object was to prepare men for manhood; but it seeks, on the contrary, to keep them in perpetual childhood: it is well content that the people should rejoice, provided they think of nothing but rejoicing. For their happiness such a government willingly labors, but it chooses to be the sole agent and the only arbiter of that happiness; it provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of property, and subdivides their inheritances: what remains, but to spare them the care of thinking and all the trouble of living?

Tocqueville wasn’t talking about Hitler’s Germany or Stalin’s Russia. He was talking about an America where we forget the value of liberty. Most Americans will embrace this zombie like existence.


Daniel Denning
for The Daily Reckoning
August 8, 2002

p.s. The Warfare State is coming. And it’s coming for you. My advice: get as rich as you can as quickly as you can. Click here to learn how:

Strategic Investment

Editor’s Note: Daniel Denning is the editor of Strategic Investment. You may remember Dan from his earlier investment advisory service. His focus on little-known stocks led investors to profits as high as 5,182%…as well as over 570% on Isle of Capri Casinos, 457% on Big Entertainment, 411% on Gentner Communications and 130% on Total Research Corporation.

Today, Denning is the architect of Strategic’s winning portfolio up across the board, while Wall Street’s finest take it on the chin.

Bill and Addison are both in transit today, but Eric’s back on the job in New York… so we’ll check in with him straight away… Eric?

Eric Fry on Wall Street…

– The stock market chalked up its second straight winning session yesterday. The Dow gained 182 points to 8,456, while the Nasdaq advanced 21 points to 1,281.

– Over in the commodity pits, gold put on a dazzling show by soaring $8.80 to $316.10 an ounce. But the yellow metal’s surprising performance failed to inspire a strong rally in gold stocks. The XAU Index of gold stocks gained less than 2%.

– If gold-stock investors have become a little gun-shy, who could blame them? In recent weeks, gold stocks have not been a very safe, safe-haven. The XAU Index has tumbled more than 25% since late May.

– "Gold stocks have suffered the indignity of being treated like other common stocks (in some cases worse)," Jim Grant observes. But Grant remains, as always, bullish on the precious metal, and in the latest issue of Grant’s Interest Rate Observer shares a story that is certain to warm the cockles of every gold bulls heart: "The barbarous relic shone for 13 minutes Tuesday evening on the Upper East Side of Manhattan. At 6 p.m. at the Sotheby’s auction house on 72nd Street and York Avenue, bidding for the only known U.S. double gold eagle coin began at $2.5 million. It rose in $100,000 increments until reaching $6.6 million.

– "At the $6.6 million auction price, the ‘Mona Lisa of coins’ has compounded between 1933 and 2002 by about 20% a year. An ounce of gold without unique numismatic value has, over the same stretch, compounded at an annual rate of 4%. – "’People in the U.S. were hoarding gold,’ David Redden, vice chairman and auctioneer at Sotheby’s, told a reporter from CNN in an impromptu history lesson. ‘It was undermining the nation’s financial system.’ However, as the readers of Grant’s know full well, it isn’t the hoarding of gold that does the undermining; it’s what leads to the hoarding. Many things do, or will, in time–including a persistent imbalance in a nation’s current account. We expect the non-numismatic gold bull market to resume."

– Meanwhile, many investors have been waiting in vain for the bull market in stocks to resume, and the wait has been very costly. "Since their peak in March 2000," the Christian Science Monitor observes, "stocks have lost about $8 trillion in value, an amount equal to the annual economic output of Japan, Germany and Canada combined." Surely somebody is missing this money.

– While we may empathize with the bears, we worry about the bulls — not the well-paid, professional bulls like Abby Joseph Cohen, but the non-professional-John-Q.-Public sort of bulls who are simply trying to build up some savings. How will they respond to their staggering loss of wealth over the last two years? Will they cut their spending? Will they stop buying stocks and start buying savings bonds?

– It is already quite clear that the stock market losses have taken big a bite out of the consumer’s urge to splurge. It is also clear that a new ethos of financial conservatism is sweeping the land. Slowly but surely, free- spending consumption is going out of style and saving is coming back into style.

– "Three consecutive years of contracting household net worth just might cause Americans to become thriftier," writes Paul Kasriel, economist extraordinaire at Northern Trust. The savings rate already has started to trend higher, Kasriel observes, even as interest rates are heading lower. He concludes, therefore, "Folks are increasing their saving rate because this is the only means available to them right now to increase their depleted net worth. Historically, an increase in the personal saving rate has been the prelude to a slowdown in the economy."

– At the same time that working Americans will be saving more, retired Americans will be spending less. And that’s not going to help the economy either. The falling stock market has pushed many retired folks into the growing ranks of America’s "nouveau pauvre."

– "This is not the way retirement is supposed to be,’ one embittered retiree tells the Christian Science Monitor. "I made arrangements to be comfortable in my golden years and markets have betrayed me.’"

– Mr. Market is like that… never turn your back on him.