SPEAKING FREELY – The impending strike on Iran

Posted by Gilmour Poincaree on November 4, 2008

Nov 1, 2008

by David Fink

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say.

Fact. We are in the beginning of a worldwide recession that will last until at least late 2009. This recession will be worse than the “light” recession of 2001-2002, and the “serious” recession of 1990-1991. In scope, it will be a “severe” recession like the one in 1982.

Fact. People will start saving for the first time in a generation. The savings rate will go from a negative 1% to 8-9%.

Fact. Without increases in consumer spending, the government will have to spend trillions of dollars to restart the economy. The United States is experiencing unprecedented levels of government, corporate, and individual debt. It cannot go through a period of inflation without its economy collapsing. Policymakers know this and they will do anything in their power to prevent deflation and re-inflate the economy. The Treasury and Federal Reserve have literally been printing money in order to float us out of the current crisis in an ocean of liquidity.

This policy has been working for over two decades. However, to inject this much liquidity into the system will create tremendous downward pressure on the dollar. If the dollar falls apart, the United States will no longer have the ability to fix its problems with the printing press.

How will we know if we will be able to get out of this recession in one piece? We will need to know if, a) we are experiencing deflation or inflation, and b) if the dollar is strong enough to keep reproducing itself at this rate.

The price of gold will tell us what type of monetary environment we are in. If gold stays put at $700, or begins to go down from here, then we are in a deflationary period. For the United States to be going through deflation when everybody in this country is over their heads in debt is dangerous. For these two problems to occur during an economic downturn where unemployment could hit 10% is potentially catastrophic. Over the past month, major downturns in the stock market indices have been preceded by huge drops in the price of gold.

The US dollar index will tell us if we can still use the same medicine traditionally prescribed by Alan Greenspan. If the dollar index holds above 70, we can print our way out of this recession. If the index breaks 70, then the dollar could be in trouble. Look for higher interest rates, inflation, and the government’s ability to raise debt will be hampered – this could kill future growth.

Gold and the US dollar index have become the two vital signs of the global economy.

If there is a run on the dollar, the US will not be able to borrow enough money to fight two wars, bail out the whole financial system, and initiate a spending program that will end the current recession. Policymakers will have to make difficult choices. This presents a once-in-a-lifetime “opportunity” for President George W Bush.

The smart money has chosen Senator Barack Obama as our next president. If we don’t have a currency strong enough to borrow the necessary funds to do everything, I think Obama will try to pull out of Iraq. Given that we are winning the war in Iraq and have pledged to significantly draw down troop numbers in the next couple of years, how hard would it be for Obama to declare victory and pull out now? Politically, this would signal a message to the rest of the world that America has changed course and is ready to work with everybody else.

But that’s not why Obama would pull out.

He won’t do it for political reasons – he will do it for economical ones. A beaten-down dollar means that spending in one place will mean less money somewhere else. Up until now, Americans have been able to spend in one area, and borrow to finance another one. If president Obama doesn’t end the war, monies that are needed at home will not materialize. We will hear stories about how the everyday American can’t afford basic health care while we are still fighting in Iraq.

The popularity Obama has enjoyed as a candidate will soon turn to hostility if the average American family had to suffer because he didn’t keep his promise to end the war. His decision will be due to economic reality – but it will have very dangerous political, military, and national security implications. Most of all, George W Bush’s entire legacy will be wiped away.

Don’t you think the Bush administration is pondering this possibility?

A president is definitely most powerful when he is a lame duck who is ceding power to an opposing party. If you are the outgoing president, or a member of the outgoing administration, you are thinking one thing: if Obama wins, November and December would be ideal time to attack Iran.

Consider this:

Bush is a lame duck. He won’t be around to have to deal with any fallout from such a move.

Obama will never attack Iran. Four years from now, we will not be able to stop Iran from completing work on their bomb. Bush has always had a big sense of destiny in his leadership. If he believes that he is the only one who can save the world, he may decide to do it.

Obama can fix the damage. The Arab world loves Obama. They view him as a fellow Muslim. After Bush protects the nations of Saudi Arabia, Jordan, Iraq, Kuwait, Dubai, Qatar and half of Europe from nuclear disaster, and these nations openly proclaim their hatred for him, Obama can come to power and spend his first 100 days in office “apologizing” for Bush’s “mistakes”. The US will literally get a “free pass” for this in the eyes of the world.

When oil was at $147 a barrel, there was no way the Bush administration was going to risk spiking it to $250 – especially with a presidential election coming up. Come November, oil will be trading at $70 per barrel. A strike on Iran may raise the price temporarily to its 52-week high of $150 per barrel. The election will be over and politically, the Bush administration will have nothing to lose.

An attack on Iran will force the American military to stay in Iraq for a longer period of time. The immediate Iranian response to an American attack will be to escalate the war. They will “green light” Shi’ite groups in Southern Iraq to go back to war with American forces. They will finance and encourage terrorist groups around the world to hit America wherever and whenever. They will broaden the war in the region by inciting Syria, Hamas in Gaza, and Hezbollah in Lebanon to attack Israel – assuming they don’t fire on Israel themselves. America will have to stay at least an extra 2-3 years until things “quiet down” again. This new situation will also insure that the national security infrastructure created after September 11, and nurtured throughout the Bush administration, will not lose any of its powers during the new administration.

Members of the Bush administration, who left their jobs in the private sector, will soon be returning to the private sector. They all came from the oil industry and they want to make sure that they will be taken care of. Those 433,000 stock options in Halliburton outgoing Vice President Dick Cheney put in a trust before he assumed office – he gets them back January 20. It would be in his best interests if the shares of these companies were trading higher. That goes for the rest of the Bush administration – they will all want to make sure that the heads of the oil industry – their next employers – are happy. Obama has promised to tax the oil industry next year. An attack on Iran will drive oil prices up so that the additional revenue generated by these companies will, at a least, make up for any new tax obligations.

The aftershocks of the US attack will keep oil prices in triple digits and reinitiate the debate about drilling for offshore oil. A higher price will give big oil new political clout in developing oil fields in areas considered environmentally unsound. A heightened global tension means that the next administration will be forced to maintain current government outlays to the defense industry.

The final three points will force Obama to continue the core policies of the Bush administration whether he likes it or not. If you are viewing the world from the point of view of the Bush administration, you see a lot of very big arguments for attacking Iran now.

From this we can come to a very simple conclusion: America will either attack Iran in the next two and a half months, or it never will.

David Fink is the editor-in-chief of the daily investment newsletter Throughout 2008, his RWR Investment Portfolio has outperformed the market indices by 20%, and the average hedge fund by 3%.

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved.



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