Building The Modern 'Maginot'

The Daily Reckoning Presents: A Special Guest Essay. Having returned from a 3-week stay in Turkey, on the heels of a 10-day sojourn to Malaysia, Doug Casey offers some thoughts on America – in the eyes of the world.

BUILDING THE MODERN ‘MAGINOT’

Domestically, I’d say the biggest problem we face is the continual and accelerating loss of freedom – compounded by the prospect of what I suspect could be the biggest financial/economic crisis of modern times.

What sort of crisis will it be?

That’s unpredictable, although the odds are it will be unlike others that are still fresh in people’s memories, simply because people tend to be most prepared for the things that have most recently scared them. The big problems usually come from expected quarters at unexpected times…like the monetary crisis of 1998 that materialized in Thailand.

That said, the question remains of where to look. My guess is that the crisis will come from outside American borders…in the form of war.

Some might protest that a discussion of [war] has no place in an investment letter, but I hold it’s just as relevant as discussions of politics, science, technology, history, or any other area of human endeavor. Investments cannot exist in a vacuum.

Not considering such basics is a fundamental error.

And what happens to your investments is certainly subject to the prospect for war. I know the conventional wisdom – after Fukuyama’s End of History, and naive, albeit interesting, observations like those in The Lexus and the Olive Tree that no countries with McDonald’s franchises have yet taken up arms – is that there won’t be any more serious wars.

But I don’t buy it.

War is perhaps the worst thing that can happen, not only for the destruction it will cause in itself, but because it will immensely exacerbate America’s domestic problems.

To quote the famous words of Stirner, “War is the health of the State.”

But neither a declared war, nor war in the conventional sense, is likely in the cards. US troops have been in combat in a dozen countries since our last “official” war ended in 1945; the US troops stationed in over 100 countries are an accident waiting to happen. Besides the Balkans and Iraq, Colombia is probably highest on the dance card, but almost anyplace could erupt unpredictably

Who, after all, could have predicted that the US would invade Somalia in 1991, a country few people besides stamp collectors even knew existed? No place is safe from attack in The National Interest of the world’s self-appointed policeman.

Anything is possible within this context, but I discount the likelihood of another Vietnam, again because of the “recent collective memory” phenomenon. Vietnam is perhaps the major reason why the Iraq attack ended so quickly; a speedy withdrawal obviated any danger that ground troops might get stuck in a major tar baby. But when you’re sticking your nose absolutely everywhere it doesn’t belong, there are lots of ways to get it bloodied.

My guess is that something resembling a Crusade is developing against those who live in the Koran Belt. It won’t be overtly religious like the crusades of the Middle Ages, but it will have major cultural undertones.

And there’s every prospect it will be highly unconventional in nature.

This is why all the talk about a strategic missile defense system (ABM) for the US is so totally ridiculous.

Why would an enemy of the US spend a fortune building ICBMs – a clunky, inaccurate, 1950s era technology – when a plethora of ABC (atomic, biological, chemical) weapons can be sent by Fed Ex? They’ll arrive exactly where you want them, and precisely on time.

You may think I’m joking, but the most effective delivery system is one that’s cheap, reliable, unexpected, redundant, untraceable and hard to detect until it’s too late. If you have an especially large device to deliver, it can be shipped as cargo in a conventional boat or plane. Indeed, just as a car bomb is great for taking out a building, an equally innocuous boat or plane can take out an entire city.

When the attack comes on the US, that’s the form it will take. Ballistic missiles may have some terror/propaganda value for countries like North Korea or Iraq, for use against regional enemies. But these people aren’t stupid; they know that if they launched a strike on the US with a missile, there’d be no question about its source. And no question about the response.

No government or group would dream of attacking the US in that manner, since it would literally amount to signing their own national death warrant. It’s simply not going to happen that way. If they want to take out some US cities, it won’t be with a missile.

Why, then, does the US government want to spend scores of billions on a missile defense system that’s worth less than a Maginot Line? In fact, they should nickname the ABM – in the manner that’s long been the case for US weapons – the “Maginot.”

Are they really that stupid? Or is the money flowing to defense contractors really that important? Or is it a PR stunt to convince Boobus Americanus that he’s safe? Or all of the above? I don’t know.

But to me, it’s absolute proof that the generals and their masters are just as intent on fighting the last war as has been the case every time in the past.

This isn’t unexpected. The US has – depending on who’s doing the accounting, and how many are built – spent $2 billion on each B-2 “Sitting Duck” bomber, and will spend $250 million on each F-22 “White Elephant” fighter, an aircraft superbly suited to fighting a non- existent hi-tech enemy.

Even if building these hi-tech showboats was a good idea, I question whether these devices aren’t overpriced by an order of magnitude. You’ll recall that the P-51, the best fighter of WWII, went from the drawing board to production in seven months, and was cranked out at $50,000 a copy. OK, say that’s $500,000 in today’s money, and the F-22 is vastly more complex and capable. But the real prices of raw materials has plummeted, and the advances in technology have done the same for both design and manufacturing costs

If nothing else, it’s a testimony to the inefficiency and corruption inherent to the procurement system.

Entirely apart from that, any (serious) potential enemy will make sure they’re taken out on the ground with saboteurs, special operations units, or ABC weapons. When you’re dealing with aircraft that cost a few million, and you’ve got thousands of them widely dispersed, these things are manageable. But when you’ve got very limited numbers you can buy at hundreds of millions a copy, it’s a different story. The US will hardly dare deploy these weapons because the loss of only one in combat would be a catastrophe.

But these are strictly tangential points. Weapons like these are as useless as the ABM against what’s coming in the next war.

It’s a truism that the best defense is good offense. But it’s only true once you’re in an active war, and are trying to win it. Regrettably, the US is confusing good offense with running around the world giving offense, and it will only result in starting a war.

The only defense against the kind of attack that will open the next conflict is, frankly, to give the attacker no reason to attack. Does Argentina, or Canada, or Italy, or Thailand or, really, any country in the world besides the US, have reason to fear a massive ABC attack? The answer is no. Sure, the Indians and the Pakistanis, the Chinese and the Taiwanese, the North and South Koreans could attack each other. But the source of the threat is discrete.

Only the US is running around the world, whacking a hundred different hornets’ nests. A major power could get away with this in the past. The most the natives could do in retaliation was assassinate the odd dignitary, or ambush the odd patrol. But the world has changed. Now, if you antagonize a group badly enough, they’re entirely capable of bringing the war to your home ground. The World Trade Center bombing, which should have, by all rights, been a success, and the USS Cole bombing, which was a stunning success, are only the most trivial examples of what’s in store.

Almost anyone can build a nuclear device today. Various designs are published, and the methods of enriching uranium are not complex. It’s not rocket science any longer. Moreover, why bother, when a million dollars passed to a Russian general (or maybe just a sergeant, since he actually handles the things) can buy you state- of-the-art equipment?

That’s even more true of biological and chemical weaponry.

The question isn’t whether it will be used. That’s a certainty. Anything that can be imagined can probably be done; and anything that can be done, probably will be done. It’s simply a question of when. And by whom.

Yours truly,

Doug Casey,
August 2, 2001
for The Daily Reckoning

*** “A gradually rising asset price acts like a natural Ponzi scheme,” writes Paul Krugman in the NYTimes. “Each new wave of investors creates capital gains for the previous wave.”

*** Krugman is talking about the US dollar. Since ’95, the US has been running the largest current account deficit in the history of the world – bigger by percentage than either Korea or Indonesia prior to the Asian crisis of 1997… and the dollar hit a 16-year high on July 5th.

*** Yet, according to the IHT, Treasury Secretary O’Neill has said of late he doesn’t believe the dollar is overvalued, that concerns about the current account deficit are based on “trivial and wrong notions”… and the GDP is obsolete.

*** “When white-haired execs start rejecting old- fashioned accounting,” says Krugman, “the Ponzi scheme is about to run out of suckers.”

Eric, what’s new in New York?

*****

Eric, back from vacation, refreshed:

– “We may well get a significant second-half recovery,” writes Barron’s Alan Abelson. “It just won’t be in the second half of this year.”

– Still, the “long-awaited” summer appears to be under way. The Nasdaq has gained about 7% since early last week and some of the old favorites – notably, the semiconductor stocks – have been particularly stellar performers.

– Yesterday alone, the Nasdaq gained more than 2%, even while the Dow stocks struggled. The Dow, which had gained as much as 77 points midday, finished the training session down about 13 points.

– Abbey Cohen says “the worst is over,” trying to answer the question on everyone’s lips… have we bounced off the bottom?

– “On average,” reports Fleet Street Letter contributor John Mauldin, “the S&P 500 has risen 32% from the market’s bottom before the earnings cycle bottoms out… it seems easy enough. Just invest when the blood is running in the streets. But the trick is to figure out when things are worse. Are we looking for ankle deep… or knee deep blood?”

– Mauldin has his eye on the three key “indicators” he believes signal turnaround in the S&P… watch this space. “Just because things may look pretty bleak today,” says Mauldin, “there’s no reason they can’t look worse tomorrow.”

– Still, uncertainty in the markets has left the nation’s millionaires undaunted. According to a recent survey by Forrester, more than 90 percent of millionaires surveyed said that they would either maintain or increase their investments in the stock market.

– And anyway, what’s to worry about? When investments don’t pan out as hoped, you can always sue your broker.

– “Among the basic freedoms granted to all U.S. citizens,” muses the Red Herring, “are the right to express oneself, the right to bear arms, and apparently, the right to sue the pants off someone when you lose money, even if it was your own fault.”

– “Considering that as of June 25th,” the article continues, “the Nasdaq was down 59.4% since its peak on March 10, 2000, class action specialists like law firm Milberg, Weiss, Bershad Hynes & Lerach are having no problem recruiting plaintiffs.” The number of lawsuits pending against brokerage firms is growing by the week.

– Yet few investment banks appear outwardly concerned about their growing exposures to disgruntled investors. Indeed, many investment banks are busy sowing the seeds of future lawsuits. Worth magazine reports, “Now a growing number of blue-chip investment banks are actively marketing derivatives to a retail audience, expanding the reach of investment strategy that was once the exclusive domain of institutional investors and the super-rich. According to a report by Merrill Lynch and Cap Gemini Ernst & Young, almost a quarter of individuals with portfolios worth $1 million or more have dabbled in structured equity products.”

– If these derivatives fail to produce the desired result, is there any doubt that many of these aggrieved millionaires will “dabble” in lawsuits against their brokers?

– Addison, your comments yesterday about the American real estate bubble are spot on. After spending two weeks in California, it’s clear that confidence in real estate values remains unshakable… for now.

– Most of my friends admitted to having lost a lot of money in the stock market. But each would quickly volunteer that the “value” in their home continues to appreciate. One doctor I know – whose 2500 square-foot home in Marin County is currently worth more than $1 million – told me with a perfectly straight face, “It’s nice to know I can take the equity out of my home – anytime I want – and retire.”

– Wasn’t it just a little more than a year ago that shares of Cisco, Corning and Ariba seemed as good as “money in the bank?”

*****

Back to Addison in Paris…

*** A note from CNNfn.com explaining Tuesday’s rally: “U.S. stocks rallied at midday Tuesday, shaking off a sluggish start, after data showing a pickup in consumer spending suggested that the tax rebate checks now being mailed to millions of Americans are lifting retail sales.”

*** “Interesting,” says Mark Rostenko, the Sovereign Strategist. “The first checks went out last week and ALREADY they’re impacting last month’s consumer data! Talk about retroactive gains. Maybe G.W. should try to push through some more cuts and give first and second quarter GDP a lift too.”

*** Well, looks like it’s not just lawsuits, anymore. “Laid-off Workers Are Striking Back” reads a headline in the IHT. “Many workers have put in endless hours and sweat for the promise of hefty stock options that never materialized,” says psychologist Beverly Smallwood.

*** One 56 year-old ex-employee left a note saying: “I have been loyal to this company for 30 years. I was expecting a member of top management to come down from his ivory tower to face us with the layoff announcement, rather than sending the kitchen supervisor with guards to escort us off the premises. You will pay for your senseless behavior.” The man later confessed to sabotaging his former employer’s computer system – at a cost of $20 million.

*** Thom Hickling, part-time writer, full-time minstrel and friend, sends word from Baltimore that times are truly getting tough. Thom’s 94 Plymouth Horizon – lovingly referred as the “thundernugget” – was stolen from out in front of one of the Agora buildings.

“Crackheads,” said the police.

“What would a crackhead want with that ol’ thing?” asked Thom. He suspects someone holding shares of JDS Uniphase.