Make War Your Friend, Part II

Q.:What about Iran?

A.: I’m desperately looking for the time to visit Iran while that’s still possible. But my take, from reading and talking to overseas Iranians, of whom there are more than a million in North America alone, is that attacking it would be insane. One reason is that there’s plenty of restiveness among young people; they’ll likely, sooner or later, kick the mullahs out. Unless the U.S. attacks, in which case they’ll unite the way Americans would and try to find a way to counterattack.

Another reason is that Iran is a very large, sophisticated and well-educated place, with plenty of cash-although it’s cash that’s being badly managed, as is always the case with socialist economies. Since WW2, we’ve only invaded really small, poor, primitive places. Iran is big game.

Israel has threatened to act on its own if the Iranians build a nuke. I think that’s most foolish; nobody can hold back technology. But I’d let it be the Israelis’ problem, not ours. They’ve simply got to learn to get along with their neighbors. It’s too bad they live in such a bad neighborhood, but the location was their choice.

Q.:But isn’t Israel fighting for its survival?

A.: As hard as this may be to imagine, Jews, Christians and Muslims got on quite well in the Palestine before the aliyahs, the waves of Jewish immigration, began in earnest early in the 20th century. Then trouble started, as it does whenever there’s massive immigration from a different culture-especially if the newcomers are much better educated, cohesive and motivated than the locals. Things got out of hand when the Jews decided to transform Palestine into Israel in 1949. Israel’s formation is understandable, I suppose, in light of what the Jews had just been through during WW2. And what they’ve done is certainly nothing new in history, which, in addition to being little more than a compilation of the crimes, follies, and misfortunes of mankind, as Gibbon observed, is basically just a register of involuntary real estate transactions. Actually, if the Bible is to be believed, it’s the second time the Jews have done the same thing to the same people in the same place. The Promised Land and all that.

One thing seems baked in the cake: the Israelis aren’t going away voluntarily, and the Muslims, particularly the Arabs, particularly the Palestinians, are very unhappy about it. And the Muslims don’t need to fight to win; simple demographics would seem to guarantee their eventual victory at the ballot box. Democracy in action; that should make the U.S. Government happy. Meanwhile, as the recent Israeli/Hezbollah dust-up in Lebanon has demonstrated, even the military situation is turning against Israel. Their hi-tech, American-style weapons are great for fighting a conventional army. But they’re nearly worthless in asymmetrical, guerrilla-type warfare, where they’re not even fighting another state.

Q.:Isn’t that an overstatement?

A.: I think not. Another thing Osama has said is that he plans to beat the Americans by letting them bankrupt themselves-but Washington seems to have disregarded this statement as well. The math is quite simple. Their cost of fielding a fighter, typically a highly motivated teenager who feels he’s defending his family from alien invaders, is next to nothing. Our cost of fielding a U.S. soldier, typically a teenager looking for a college loan, or an adventure to help him grow up, is hundreds of thousands of dollars. Our cost for an M1 tank, or a Bradley fighting vehicle, is several million dollars. Their cost for an IED to blow up is next to nothing. Our cost for an F-16 to launch an air strike is maybe $40 million. Their cost for a SAM to bring it down is maybe $5,000.

Actually, it’s worse than that. The new Joint Strike Fighter will cost something like $300 million a copy. I can’t imagine who that’s supposed to be used against, besides the U.S. taxpayer. At best it’s an open provocation to the Russians and Chinese. And with the Persian Gulf, basically a shallow and narrow lake, full of U.S. warships at anywhere from $500 million to $5 billion per, it’s going to be a real shooting gallery for anyone who has a good supply of $1 million anti-ship missiles that can travel 2,000 mph. I’m sure the Iranians are planning on swarming the things. If the U.S. Navy isn’t careful, they’re going to wind up looking like the Japanese at Truk Lagoon.

It’s said that the generals always fight the last war. And that’s precisely what the U.S. military is prepared to do.

It’s perverse that the U.S. Government spends more than $400 billion per year on “defense,” almost as much as the rest of the world combined, and America basically has no defense at all. People are in a lather about North Korea launching missiles. This is a complete non-event. If the Koreans, or anyone else, want to attack a U.S. city, the last thing they’ll do is use a missile. Not only are they unreliable and inaccurate, but the victim can tell precisely where it came from, which is equivalent to the attacker signing its own death warrant. I have little doubt there will be one or more nuclear events in the U.S. over the next generation, but the delivery systems will be container ships or private yachts. Cargo plane or private jet. Or maybe FedEx. And nobody will know for sure who sent it. In today’s world, there is no military defense against attack.

Q.:So what should we do? Just roll over to the bad guys?

A.: Of course not. But it pays to think these things out beforehand, not jump around, hooting and panting like a chimpanzee the way Bush is doing. Start by noticing that the “bad guys” all sincerely see themselves as good guys. Even Hitler had the self-image of a man fighting for right against the forces of evil.

It’s insane to go out of your way to provoke people who can do you serious harm, especially if it serves absolutely no purpose. Remember “Bring it on!”? This is just one of several signs that Bush may be psychologically unstable, in addition to being demonstrably unintelligent, ignorant and thoughtless. The accelerating War on Islam has no upside. If it gets out of control, scores of millions of people could die. We’ll defeat them, of course, but it will be a totally Pyrrhic victory. The real winners will be the Chinese and the Indians.

So the wise course is to defuse the bomb before it goes off. Here’s what I suggest:

  1. Withdraw all U.S. troops from foreign soil. As hard as it is for the average American to understand, foreigners like American soldiers running around in their country about as much as Americans would like an Islamic army here. Even if they were supposedly invited by Washington. Prognosis? This will eventually happen, but unfortunately, for pretty much the same reasons the Romans came home.
  2. Cease meddling in other countries’ affairs. Despite our politicians’ certainty that they know what’s best for the natives, economic and military aid should stop. Not just because we have to borrow money from the Chinese to dispense it, but because it always makes steadfast enemies and gains only a fickle friend who has to stay bought. Prognosis? This will happen too, but only when the USG is forced to acknowledge bankruptcy.
  3. Make a sincere and well-publicized apology to the Muslim world for having caused so much grief and promise it won’t happen again. Yes, I recognize the chances of this happening are about the same as those of Bush appointing me SecDef.
  4. Return to the principles that made America unique and the world’s best-loved and most respected country. This is, of course, a complete pipedream.

In light of what needs to be done but won’t be done, I think it’s prudent to prepare for some really rough times ahead.

Q.:So you expect more terrorism?

A.: First, let’s discuss that word. Bush calls what he’s doing now a War on Terror. Which is completely idiotic. Terrorism isn’t an ideology, it’s a method, a tactic. Having a war on terror is as ridiculous as having a war on cavalry charges or frontal assaults or commando raids. Terrorism may be defined as an attack on a society’s non-combatants, with the intention of weakening their support for the status quo. It’s a tactic that melds the political with the military, much as guerrilla warfare does. But what’s new or strange about that? Clausewitz pointed out that war is nothing but the continuation of politics by other methods. Anybody can use terror, and most combatants do. We used terror extensively in WW2 with the fire bombings of places like Hamburg, Dresden and Tokyo, when there was no military reason for it. Terrorism was what the Phoenix Program in Vietnam was all about. Everybody accuses his enemy of terrorism. It only seems illegitimate when the terrorist isn’t a recognized state.

One advantage of terrorism is its low cost. You don’t have to invest billions for cruise missiles to blow something up if you can get a guy to drive a truck full of explosives to the same place. It’s strictly PR to style only the latter as terrorism. Remember the old line “I’m a freedom fighter, you’re a rebel, he’s a terrorist”? You don’t hear it much anymore, I suspect, because it strikes too close to home. It sounds somehow seditious now that the war is underway. But this is to be expected. Truth is always the first casualty in war.

Q.:The current U.S. foreign policy would seem to be the containment of Iran and Syria. But containment turned out to be a failure in Vietnam. Why do you think we are trying it again in the Middle East?

A.: You know, you put people in a position of power, and they’ll predictably find some way to justify their existence by using that power as promiscuously, and therefore stupidly, as possible. It doesn’t matter if we’re talking about the lowliest bedbug working for TSA or the Secretary of State.

Containment was a moronic concept not only when it came to Vietnam, but the whole Soviet empire. These places couldn’t even feed themselves. Their factories were museums of industrial archaeology. Their citizens joked “They pretend to pay us; we pretend to work.” The USSR would have self-destructed decades before it did, were it not for the U.S. acting as a bogeyman, which united its numerous nationalities, all of whom hated one another, against a common enemy. Worse, the U.S. propped the place up with technology transfers and loans. The only thing the Soviets had going was a military, which bankrupted them. And even the military was a paper tiger, as the Afghans proved.

Vietnam had absolutely nothing, only what the Soviets gave them. Except for one thing: spirit, because they were fighting invaders from an alien culture. People will always fight for their homes against foreigners, even if the homes are hovels, and even if they have nothing but sticks and stones for weapons.

To me it just showed how little confidence the average American had, and has, in his civilization that he could actually feel threatened by a small, desperately poor bunch of peasants, who barely even knew that America existed. It’s proof of what Spengler said, that a civilization can’t be conquered from without until it’s already rotted from within.

We should let these people work things out for themselves. By sticking our nose in their business, we make fickle friends but really serious enemies. In fact, we should have let the Soviets and the Nazis sort things out after Hitler attacked in June of 1941. The chances are excellent both empires would have collapsed in exhaustion, and the Cold War, which barely escaped turning into a worldwide thermonuclear war, would have been avoided. No Korea. No Vietnam.

Q.:The ultimate price tag of the war in Iraq alone is estimated to top one trillion dollars. That’s real money. How does the country afford that, and what are the consequences to you and me as taxpayers?

A.: In pre-industrial times, wars could actually make economic sense, at least for the short run. You sent your army somewhere to steal valuable goods-gold, cattle, fabrics, artwork, women, slaves-and bring them back home. The folks back home liked the improvement in their standard of living. Better, after you killed the natives, you could distribute the land to your soldiers. And the natives who were left would be a source of continuing tax revenue. In those days, the most practical version of the Golden Rule was “Do unto others-and do it first.” There was a lot to be said for devastating your neighbors before they became large and powerful enough to devastate you. War, assuming it was successful, had some real advantages.

In today’s technological world, however, war is a totally different animal. Wealth is no longer something you can steal wholesale. This is why I never felt the Soviets would have invaded Western Europe-you can’t effectively steal businesses and technology, which are the main forms of wealth today. As economically illiterate as Marxists are, the Russians intuitively understood that.

The argument is made that we’re in Iraq to steal the oil, which is absolutely the only thing of value in the region. After all, Boobus americanus might self-righteously say to himself, “What’s our oil doing under their sand?” Of course it’s true that the Arabs wouldn’t even know what oil was, much less how to extract and use it, were it not for Western companies-which discovered and developed the deposits, only to have them stolen by the local governments. But in my view, that’s a problem for those companies’ managements and shareholders. It’s perverse to make it the problem of the U.S. taxpayer.

The direct cost of this war has been estimated at between one and two trillion. But who knows? The tab depends on how long the war lasts and how it mutates before the Americans have to abandon everything they’ve done in a panicked exit. Put it this way. Even if we were to ship out every drop of Iraqi oil, at zero production cost, that oil would still cost about $12 per barrel due to the war alone. It’s a ridiculous proposition from an economic point of view.

But the real costs are indirect. I’m not talking about the tens of thousands of permanently maimed and disfigured U.S. soldiers who will have to be compensated. Or the hundreds of thousands of dead and disabled Iraqis who will never be compensated. Or the wholesale destruction of the country itself. After all, we did pretty much the same thing in Vietnam, and life went on. The problem here is that Bush may have started what amounts to WW3. Vietnam was a small, isolated, pitifully poor and backward place; so we could get away with destroying it… although we almost destroyed ourselves in the process.

The difficulty is that the Muslim world sees itself as a whole. The worldwide Muslim community, notwithstanding the Shia/Sunni conflict, very much sees itself as the ummah, which is somewhat their equivalent of our term “Christendom,” a term that no longer has much meaning. Fortunately, for most Americans and Europeans, religion is largely a cultural artifact, a relatively insignificant accident of birth. I say fortunately because it liberates their minds to pursue things like science, technology and business; it allows them to think for themselves and not automatically see those who believe in other religions as infidels. Muslims, as a rule, take their religion much more seriously. It’s one reason the Muslim world is so backward.

We forget that the conflict between Islam and the West has been going on for over 1,300 years. Up to the Battle of Vienna in 1683 where the Turks were turned back, the Muslims actually had the upper hand, except for the interlude of the Crusades, when the Europeans invaded the Levant. But since the start of the Industrial Revolution, we’ve had the upper hand. And since the 19th century, most of the states of the Muslim world have been either European colonies or puppet governments. And we drew the boundaries.

It’s a history they resent. So would we.

Q.:Turning to other topics, do you think it is realistic that the U.S. dollar could lose its status as the world’s reserve currency anytime soon? What are the implications and how soon do you think it could happen?

A.: The U.S. dollar will eventually reach its intrinsic value; it’s simply a question of time. The Forever War is greatly accelerating the process. The whole idea of a reserve currency is meaningless if the currency is backed by nothing but the good will of the issuing government. That’s why gold has always been used as money; you don’t have to rely on anyone’s full faith and credit, good will, competence, trade surpluses, self-restraint or anything else. And it’s why gold will again be used, in everyday transactions, as money.

The dollar is a hot potato. there are trillions-nobody knows exactly how many-floating outside the U.S. But only Americans have to accept them, and only the U.S. Government can create them (although the North Koreans do their best). The Chinese have good reason to worry about all those dollars. When they tried to buy the Unocal oil company, they were turned away by the U.S. Government. So, obviously, their dollars weren’t good for that. When Dubai wanted to buy companies that manage six U.S. seaports, they found their dollars had no value.

At some point there’s going to be a panic out of the dollar. When it happens, it’s likely to be the biggest financial upset since the 1930s. Part of the question is what they’ll panic into. The euro? As I have said many times, if the dollar is an “I owe you nothing,” the euro is a “Who owes you nothing?” I think the big beneficiary will be gold. The problem for the world’s economy is that just a trillion dollars-which is only about 1/6 of the dollars outside the U.S. alone-can buy a billion ounces of gold, even at $1,000 an ounce. But only about four billion ounces have ever been mined.

It’s an explosive situation. The one thing you can count on when there’s a crisis is that the government will “do something,” which means controlling its subjects-not, God forbid, itself. And that something is likely to be foreign exchange controls. A small straw in the wind is the new regulation making it illegal to export more than $5 worth of pennies and nickels, because their metal is worth more than their face value-even though there’s no longer much copper in the pennies or nickel in the nickels.

If an American doesn’t get significant assets outside the U.S. now, it may be impossible in the future. The best thing to do is buy real estate abroad, since it’s currently not reportable, like bank and brokerage accounts, and they can’t very well make you repatriate it. I expect, however, very few people will take my advice, even though they may agree with it. But everybody gets what he deserves, so it’s not a problem..

Q.:Looking at the broad picture, it seems like the U.S. government is facing nearly insurmountable odds. The cost of government has soared to something over 50% of GDP, weighing heavily on the private sector, yet there is no end in sight to the wide river of can’t-stop spending… on the military, on Social Security and Medicare-especially in the face of the baby boomers beginning to retire. How does the country manage to maintain that?

A.: Nothing lasts forever. I’ll be surprised if the U.S. is able to maintain its present geographic boundaries for this century. The Mexicans talk of the Reconquista; the gringos stole the Southwest from them in the 1800s, and they’re likely to take it back. What do you think the odds are that a young Latino male in California, 20 years from now, is going to pay 20% of his wages in Social Security and Medicare to support some old white broad in Massachusetts? Especially since he knows he’s never going to get an aluminum nickel back? Even today, polls show that more kids believe in aliens than believe they’ll see any Social Security money.

We’ve had really good times for a whole generation. People become fat and sassy, or in the case of Americans, obese and arrogant, during good times. They don’t think of hanging their leaders from lamp posts until things get seriously bad.

I don’t know how bad things will get. But when I’m asked, I’m prone to quip “Worse than even I think they’ll get.”

Q.:You and the team at Casey Research have been vocal about expecting a major inflation. Yet, other than occasional surprises-such as the 2% jump in the PPI for November-inflation doesn’t seem to be much of a problem. What gives?

A.: Things that you expect to happen usually take longer than you’d think. But once the process gets underway, they usually happen much more quickly. It’s like a boulder balanced on the edge of a cliff; nothing seems to happen until it happens all at once. Just adjust that analogy to the scale of a human lifespan.

The word “inflation” covers two different concepts, and it’s important to keep them separate. One concept is monetary inflation, which is an increase in the supply of money that outruns growth in the supply of goods and services. The other concept is price inflation, which is an increase in the overall level of prices for goods and services.

The relationship between the two is the relationship of cause and effect. Monetary inflation causes price inflation. But while almost everyone sees price inflation when it happens, few people notice the monetary inflation that is causing it. And so they tend to blame the producers of goods and services for higher prices-rather than the money-creating government that is the true culprit.

We’re now experiencing a lot of monetary inflation, which eventually will be reflected in price inflation. What’s really going to tip this over the edge, however, is the rest of the world deciding to get out of dollars. A lot of those $6 trillion abroad are going to come back to the U.S., and real goods are going to be packed up and shipped abroad. Inflation will explode.

It’s just a matter of time. But I think it’s going to happen this cycle.

Q.:Last year you went on record early calling for gold to top $700, which it did. But you expected it to end the year at about $750. Currently, it trades at around $640. Why do you think it didn’t hold up? And, just for entertainment purposes, how high do you think it will trade in 2007?

A.: I’m sure the government, directly and indirectly, did everything it could to keep the price down. The last thing they want to see is a gold panic. So the short run is hard to predict. But we’re still relatively early, certainly in terms of price, in what will be a bull market for the record books. It’s as if you can see the perfect storm brewing. Since I’ve been involved in the markets, there have been a number of times when things could have come unglued-’70-’71, with the stock market crash and the devaluation of the dollar, ’73-’74, with another market meltdown and financial crisis, ’80-’82, when commodities and interest rates both went through the roof, ’87, ’92, ’98, the tech meltdown… Throughout that time, I’ve always tended to be a bear. In other words, I’ve tended to make my money during the crises; it’s relatively easy to make money during good times. As the tech boom proved, any idiot who knows nothing about the markets or the economy, can do it.

My guess is that the next crisis is going to be breathtaking. And it’s not going to be just financial, but economic, social, military and political. Of course, I hope I’m wrong. If I’m wrong, I’m not likely to get hurt, for a number of reasons. But I don’t want to be inconvenienced if I’m right.

So where is gold going? I hate making predictions. I’m not a fortune teller. But I think this is the year gold goes over $1,000. And then the mania starts for the mining stocks…

Doug Casey

January 25, 2007