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This is a long discussion on four issues of current interest: (1) the economy and the U.S. dollar; (2) North Korea; (3) Iraq; and (4) Iran and Syria. Desptie what some people have said about how sanctions don't work and how military pressures don't work, history tells a different story. Under sufficient pressures, anyone of us made of flesh and blood is sure to implode. This is just a law of Nature.
A Commentary on Issues of Current Interest
-- by Robert M. Liu
(1) The economy and the U.S. dollar:
Five years ago (in 2002), the price of gold was below US$320 per ounce and the U.S. dollar was the strongest currency in the world. In the meantime, the U.S. economy was under deflationary pressures, and the Dow Jones Industrial Average plummeted to 7300.
In retrospect, that was a great buying opportunity for investors. If Congress had taken that opportunity to reform America's Social Security program by allowing working Americans to put part of their Social Security money in private Social Security investment accounts under certain guidelines as the Bush administration recommended, the Social Security insolvency issue would have ameliorated somewhat by now.
But as you may recall, the Democratic obstructionists in strong opposition to the private-account reform proposal came out with TV commercials depicting wheel-chaired senior citizens gliding downhill all the way to their financial abyss. You can bet your farm that these left-wing demagogues never read economics textbooks, but they are all experts in alarmist tactics.
True, stock market investment has its risks, but they should not be blown out of proportion so that its advantages are shut out of view. The fact that the Dow is currently fluctuating between 12700 and 14000 and gold trades around US$800 per ounce is evidence that the Democrats were wrong.
Furthermore, don't think that as long as you hold your savings in cash, you face no risks. Your cash savings are printed paper whose purchasing power diminishes over time. No longer backed by gold reserves, the U.S. currency is fiat money which the Federal Reserve can create at its pleasure and whose value is backed solely by the credibility of the U.S. government.
Other factors contributing to the dollar's weakness include: Congress's irresponsible deficit spending habits and the high cost of the war on terror. While the latter is necessary for national security reasons, Congressional "pork barrel" earmarks whether under Republican or Democratic control can hardly be justified in time of war and are sure to undermine the U.S. government's credibility and the public's confidence in the U.S. dollar..
Although federal deficits have been falling in recent years as a percentage of GDP thanks to strong economic and tax revenue growth, they still add to America's total national debt, necessitating government borrowing from either the general public or the Federal Reserve.
When the federal government borrows from the public through Treasury Securities sales, it sucks liquidity from the credit market, competing for funds with the private sector. Theoretically this should drive interest rates upward. But the Fed could buy back Treasury Securities through its open market operations, injecting liquidity into the banking system.
If the federal government borrows from the Federal Reserve, the Fed writes out a check for a certain amount in the government's favor and increases the Fed's own inventory of Treasury Securities by the same amount. As you can see, if the Fed does not sell this amount of Treasury Securities to the public, it is actually creating new money for the federal government to spend.
When the federal government awards its contracts to business corporations, it stimulates demand. As the government pays its bills with the money created by the Fed, billions of dollars flow into the bank accounts of companies, agencies, and their employees. These new deposits enable commercial banks to have extra reserves. Each extra dollar in reserve allows a bank to lend out about 10 extra dollars, creating even more liquidity in circulation. Hence, such extra dollars in reserve are called "high-power money". This new liquidity, if not drained by the Fed through its open market Treasury Securities sales or repurchase transactions to take back its loans to commercial banks, is liable to cause inflation and dollar weakness.
By slashing the target Fed funds rate to 1% in 2003 and allowing it to stay at that low level for a year or so in order to fight deflationary pressures, the Fed created huge amounts of new liquidity in the economy. This and the Bush tax cuts reinvigorated economic growth and job creation and boosted corporate America's profitability, as is reflected in stock prices.
The Democrats' alarmist TV commercials were targeted at ordinary citizens like the grandma with a small nest-egg who lives next door to you and may have scared them into a cold sweat. Yet exactly at that moment in 2002, the market bottomed out and started to rebound. I would guess that some Wall Street big players were bottom fishing. Apparently, they totally ignored the left- wing TV ads and got loaded up with stocks, and today they are much better off. The message here is that if you want to become rich, you need to learn from the rich, rather than watch or listen to left-wing nonsense, which won't get you anywhere financially.
Fast forward to the present, the economic pendulum since 2002 has swung from deflation to inflation, and the Fed is now in a dilemma. With unemployment at 4.70% and estimated third quarter 2007 GDP growth at 4.9%, the U.S. economy is actually operating at its full-employment level. The deflationary gap which existed five years ago has long gone, thanks to the Fed's easy credit policy. As easy loans flooded the market, the prices of tangible assets such as stocks, gold and real estate all soared.
Economists believe: mv = py. Here, m stands for money supply; v stands for velocity (the speed of liquidity circulation); p stands for price level; and y stands for real GDP. In theory, p = mv/y, meaning a higher real GDP would bring a lower price level. In reality, when money supply is high, economic activity accelerates, driving up velocity. As a result, both y (real GDP) and p (price level) tend to increase. Simply put, excessive money supply brings inflation.
Currently, the prices of stocks and gold remain high. Stocks have gained support from the strong earnings performances of America's multinational corporations aided by strong exports and the fact that the weakness of the U.S. currency enables overseas corporate profits to translate into more U.S. dollars. Whereas gold is buoyed up with strong global demand as investors have lost confidence in the U.S. dollar and the Fed's determination to fight inflation.
The real estate market, where a housing price bubble created earlier by low mortgage rates has burst, now poses a huge problem to the economy. A number of homeowners who made their purchases on mortgage loans when interest rates were low have failed to make their mortgage payments when interest rates rose, thereby going into foreclosure. Banks involved in such sub- prime mortgage business have suffered heavy losses, triggering a credit crunch.
The Federal Reserve, which has already cut the target Fed funds rate from 5.25% to 4.50%, is under pressure to ease again to counteract an economic slowdown. Yet with gold trading at around US$800 per ounce, inflationary pressures and investors' lack of confidence in the Fed and the U.S. dollar also pose a threat to the economy. Gold is a valid proxy for anticipated inflation. Further interest rate cuts could spark serious inflation in the long run.
Imported goods from China remain cheap. If the Consumer Product Index (the CPI) consists of only Chinese imports, you could say there is no inflation. But you have to eat and you have to drive, while food prices are up and gasoline prices are up. Only the so-called "core CPI" sees no evil, as it excludes food and energy.
It seems that under various political pressures, the independence of the Federal Reserve is in question. Too many forces are calling for the Fed "to do something". Some want it to make further interest rate cuts to help the mortgage lenders though the economy operates at full- employment with no deflationary gap, while others want it to restore the U.S. dollar's credibility by tightening credit.
What bothers me is the fact that the Federal Reserve, which fought "inflationary pressures" in earnest with a 6.50% target Fed funds rate in 2000 when the price of gold was below US$320 per ounce, today appears to be not so concerned about inflation even as the high price of gold is flashing red hot warning signals of inflation, and unemployment may be below its natural rate.
In Canada, the natural unemployment rate is believed to be 6%. If joblessness fell below 6%, an inflationary gap would develop, and the Bank of Canada would be concerned about inflationary pressures. There is reason to suspect that the natural unemployment rate in the U.S. may be 5% or so, rather than 4% as some believe.
What is the natural unemployment rate in the euro zone? I don't know. Given Europe's welfare- state system which gives people more reason for not working at all, it should be no surprise if the euro zone's natural unemployment rate is 7%.
Anyway, the European Central Bank (the ECB) appears to enjoy much more independence than the Federal Reserve does in the U.S. No matter who says what, the ECB just refuses to budge. Euro zone joblessness is high, and euro zone exports are sluggish because of the strength of the euro. Still, that doesn't seem to affect the ECB's policy decisions. No wonder, one euro is now worth nearly one and a half U.S. dollars. No one talks about any "strong euro policy" -- it's already too strong. Only U.S. officials talk about America's "strong dollar policy". But where is credibility? If the Fed loses credibility, there will be consequences.
(2) North Korea:
A couple of months ago, Israeli warplanes bombed a military installation in Syria. Media reports said that the Syrian facility might have contained nuclear equipment transferred from North Korea. While the Israeli government refuses to comment on the incident to this day, the Syrians have denied the media reports, and the North Koreans have condemned the Israeli military action.
Expressing his strong skepticism about North Korea's promise to de-nuclearize, former U.S. ambassador to the United Nations, John Bolton, is concerned that the Bush administration might enter into a deal with North Korea which the regime does not deserve. In short, North Korea cannot be trusted, and verification should be the top priority in dealing with the North Koreans.
Given North Korea's track record, Mr. Bolton's skepticism is well founded. But here I wish to look at the various possibilities that might emerge from the North Korean situation. First, North Korean dictator Kim Jong-il was born in 1942, the same year China's President Hu Jintao was born. But when you compare the two men's pictures, Kim Jong-il appears to be much older than President Hu Jintao. Something is wrong with the former. Kim Jong-il may have health problems and is apparently under enormous pressures from all sides.
The U.S. has cut off North Korea's money laundering circuit in Macau, a former Portuguese enclave south of China's Guangdong Province now under Chinese rule. The U.S. is also closely watching North Korea's sea lanes lest it should smuggle its weapons-of-mass-destruction materials to other parts of the world. Japan does not allow North Korean ships to dock at Japanese ports. China is unhappy with Kim Jong-il's nuclear programs and has made clear China wants them shut down. The days of appeasement under South Korea's so-called "Sunshine Policy" may be numbered as election opinion surveys show South Korean President Roh Moo-hyun's party trailing behind the opposition Conservatives.
Domestically, Kim Jong-il faces a stagnant economy which may be on the verge of collapse. The North Korean people are starving. In the ruling clique there may be people who disagree with Kim's policies and secretly hope the "Dear Leader" will kick the bucket as soon as possible. Despite the appearance of being in total control, Kim Jong-il is in a tight spot with little room to stretch is short legs.
For survival's sake, Kim Jong-il has no choice but to depend on China's economic assistance, but being overly dependent on the Chinese has its risks. There is no guarantee that the Chinese will not use their influences to help a new leadership to emerge and replace Kim Jong-il. Chinese leaders may not want to do so today. But China itself is changing. If Kim Jong-il has sleepless nights, it shouldn't surprise anybody. Medical experts believe sleep deficit is detrimental to the heart.
What meager revenues Kim Jong-il has received, he has spent on his one-million-strong army and his nuclear programs. One would ask: For what?
Given the fact that North Korea invaded South Korea in 1950 sparking the 3-year Korean War, the possibility that Kim Jong-il may want to annex the south cannot be ruled out. But now I'm beginning to think of another possibility. That is, Kim Jong-il's one-million-strong army and nuclear programs may be a sign of his awareness that he has many vulnerabilities. The guy is afraid. First of all, he may be afraid of his own people who have suffered so much under him and may seek to overthrow him.
Also, in theory, communist North Korea should be concerned about "U.S. imperialist aggression". But rhetoric and reality are two different things. Kim Jong-il is not mentally retarded. He should know that the wealthy South Koreans have no intention of invading North Korea, and the U.S. is more concerned about North Korea's aggressive intentions against the south than is interested in invading the north.
I'd rather presume that Kim Jong-il may be afraid of China. For all the rhetoric about Sino-North Korean friendship, Kim Jong-il certainly wants to be his own man, rather than China's little brother. He wants China's economic assistance, but not China's influences on North Korea. He certainly wouldn't like to be controlled by China. Maybe, his one-million-strong army and nuclear programs are meant to protect his regime from Chinese influences.
The point is that if North Korea is more afraid of China than it is worried about "U.S. imperialist aggression", certain members of the regime may want to break out of its isolation. This in turn may open up an opportunity for the U.S. Look at Vietnam. It fought America for ten years. But eventually, it became concerned about China's strong influences. Today Vietnam has formal diplomatic ties with the U.S. and looks to the U.S. to provide a counter-balance against China's influences. Could a similar situation evolve with the North Koreans over time?
Wishful thinking this could be. But take a look at Kim Jong-il. No one can say that this man leads a stress-free, care-free existence. He is 65 years old. In ten years' time, if not dead he will be 75. The burden of mental stress he has to bear may cause him to age faster. Will he be able to manage and control state affairs by himself then? Chances are he will need capable hands to help him.
Kim Jong-il definitely should consider a way out for the North Korean regime. Even if he doesn't, some of the capable hands he will have to depend upon to manage state affairs in the future are liable to be driven by the difficult circumstances to seek a way out.
Ironically, North Korea's best way out is in Washington D.C. If Uncle Sam reached out a helping hand, North Korea's isolation would come to an end. Kim Jong-il may understand that is the case, and this may be the reason why North Korea now wants to normalize its relations with the U.S.
The problem is that Kim Jong-il may think he can outsmart Uncle Sam and play both ends of the game. On the one hand, he has promised to de-nuclearize in exchange for economic assistance from the U.S. On the other, he may be cheating on the nuclear issue and cooperating with the Syrians in nuclear development. But it's getting harder for him to cheat. After watching Kim Jong-il pull so many tricks, who would trust him?
Kim Jong-il's wriggle room is limited. Time is not on his side. His father died in 1994 at 80. His physical condition may not allow him to live to that age. Under these circumstances, some currently unknown moderates might become more assertive down the road, understanding that North Korea must verifiably de-nuclearize, or will have no way out. With a bit more patience and with sufficient pressures for verification kept on the regime, we might begin to see changes slowly unfold in North Korea. Under sufficient pressures, anyone of us made of flesh and blood is sure to implode. This is just a law of Nature.
In November of 2005, I posted an article entitled "A Tale of Two Sides" at my authorsden.com website, in which I said, "In order to effectively stabilize the situation in the Sunni Triangle, it would be ideal to deploy Sunni soldiers, Sunni policemen, Sunni security experts, and Sunni intelligence officers there, if their loyalty to the new Iraqi government can be guaranteed. It is, however, easier said than done."
I explained that Baathist influences were strong in the Sunni Triangle region and Sunni security and intelligence personnel had been trained by the Saddam Hussein regime. Then I shut up on how to resolve the huge difficulties facing the U.S. military, because I was (and still am) totally ignorant on that issue. Nor could I blindly express optimism about the U.S. military's ability to overcome such unfavorable odds.
Soon, the Democrats swaggered out with glowing, smug, I-told-you-so self-vindication and a dead certain statement that the war was lost and that it was time to cut and run. Well, they didn't actually say "cut and run". They said, "It's time to bring our troops home." But is there much difference between "cut and run" and "bring our troops home" before the enemy is defeated?
George W. Bush was really in big trouble. His presidency was in danger of going down in history as a colossal failure. Who would come to save the day? Yet, miraculously, as I mentioned in an article entitled "American Capitalism" which I posted here many months ago, the man, I mean, the President, has luck. Like the lucky poker player at the table, he was dealt the winning card at the last moment. No wonder, the Democrats hate that smirk on his face.
All of a sudden, the name, General David Petraeus, sprang up everywhere in the media, and in only a few months' time, this general turned things around in Iraq, which disappointed the folks at moveon.org who shrieked, "Betray Us!" Generals are supposed to win battles and wars. Why can't these people even bear to see an American general succeed in Iraq? And what a strange way to express patriotism by the political left!
Now, deployed in the Sunni Triangle region (including Anbar Province) are Sunni soldiers, Sunni policemen, Sunni security and intelligence personnel, since Sunni tribal leaders have decided to cooperate with the U.S. military. That is the ideal development which I didn't even dare to consider as a realistic possibility when I wrote "A Tale of Two Sides" in November 2005 but which has become a reality.
While this does not mean that the Sunni tribal leaders are now loyal to the Shiite-dominated Iraqi government in Baghdad, they must have figured out which side of the bread is buttered. No matter what ties they had with Saddam Hussein's Baath Socialist Party in the past, it's a new ball game now.
Saddam Hussein is dead. Severely disrupted by the U.S.-led coalition, the Baathist underground network is no longer able to control the Sunni population. The die-hard radical elements of what remains of the network have merged with foreign Jihadists under the brand name of "Al-Qaeda in Iraq". The prediction of Saddam Hussein's lawyers that hanging Hussein would harden the insurgency turned out to be untrue .
Under these circumstances, there is no reason for the Sunni tribal leaders to remain beholden to the non-existent Baathist regime. These smart men must have made their own calculations and concluded that to stay stuck with the Al-Qaeda-in-Iraq terrorist network is definitely not a profitable business. So why harbor the terrorist thugs? This turn of events must have drastically shrunk the safe havens for the insurgency, inducing more Sunni citizens to come forward with actionable intelligence information about the whereabouts of terrorists and their weapons cashes.
In the final analysis, we human beings are loyal to our own interests. In Iraq it is not difficult for the Sunni tribal leaders to see where their interests lie. All they need to do is to cooperate with the U.S.-led coalition. As long as they do so, they can have all kinds of assistance, financial and military. They are awarded lucrative contracts. They receive weapons and military training to form Concerned Citizens' groups to protect their own neighborhoods.
Sunni tribal leaders now have the incentive to encourage their people to join the Iraqi army and the local Iraqi police force. They are stakeholders in the future of Iraq. They have control over their local affairs and will be able to contest seats in the national parliament and positions in local or national government. Though they may not want to be loyal to the government in Baghdad, they have every reason to be on friendly terms with their rich American friends who provide them with a lifeline -- those beautiful greenbacks we all love. Money can buy a lot of things including friendship and loyalty, and America has money.
Maybe, it's time to shed some of our excessively morbid and lugubrious pessimism about Iraq and admit that we may have unduly underestimated the U.S. military's ability to fight adversities under extremely difficult circumstances. After all, it is the most effective fighting force in the world, backed by the most sophisticated military equipment and intelligence surveillance system that modern technology has made possible. Besides, the generals certainly know more about the war in Iraq than moveon.org and its Democratic sponsors.
(4) Iran and Syria:
Experts say Iran is like the former USSR (the Union of Socialist Soviet Republics). Any country where the state has overwhelming control over the economy and its people's political activities is in some sense like the Soviet Union. That's the problem with socialism. Though the word "Socialist" is not in Iran's official name "The Islamic Republic of Iran", the practice of the Iranian revolution since 1979 has been typically socialist.
Syria's ruling Baath Party is a socialist political organization that controls the country's economy and political activities. I guess this, apart from the fact that the Assad family is Shiite like most Iranians, may be one of the reasons why these two countries (Iran and Syria) are lumped together.
Socialist countries dislike the forces of freedom led by the United States, because the Thought Police of a socialist country fear that the influences and values of the capitalist Free World such as individual liberty and private property rights would cause the people under their control to start having second thoughts about their own government and political system, which could destabilize one-party rule.
But we should also see the differences between Iran and Syria. While we may be able to draw a historical parallel between the USSR and the Islamic Republic of Iran, we can't do the same with Syria. Syria is smaller and weaker, and President Bashar Assad was educated in England. Though with an accent, he speaks English fluently. I guess his father, the late President Assad, didn't send him to England to study in order for him to become the bearded Iranian mullahs' little brother.
Another factor in Syrian politics is the possibility that the Assad family may have already evolved into a dynasty or an absolute monarchy. The family may be concerned about its own survival as a dynasty. American-style democracy if introduced into Syria would send the dynasty onto the ashes of history. This may be an ideological barrier to improving U.S.-Syrian relations.
However, recent media reports indicate that infiltrations of terrorist military supplies and personnel into Iraq from both Iran and Syria have fallen off. One possible reason is that America's diplomacy bolstered by gunboats, warplanes and missiles may be beginning to bear fruit. History shows that exogenous pressures when exercised on an isolated country like Syria or Iran tend to induce endogenous changes or differences among the members of the ruling clique. Personally, I view this phenomenon as a basic rule of international geopolitics.
In 1944, as Nazi Germany was facing the pressure of military defeat, members of the Wehrmacht (the German military) developed a plot to assassinate Adolf Hitler, though it failed. In the 1980s, President Ronald Reagan ordered military action on Lybia in retaliation for Colonel Gaddafi's involvement in international terrorism. Gaddafi himself escaped injury, but his daughter died during the U.S. missile attack. Since then, the colonel has apparently experienced a change of heart. A couple of years ago, he verifiably gave up his nuclear weapons programs and came out of international isolation.
If President Bashar Assad believes that the goal of U.S. policy is not to overthrow the Assad dynasty, he needs to ask himself: What is the point of confrontation with America? If America can guarantee the survival and safety of the Assad dynasty, why not cooperate with the Americans like the House of Saud? Why should a British-educated scion of the Assad dynasty embrace a scruffy quasi-Bolshevik like Iranian president Ahmadinejad? To demonstrate "socialist solidarity" between the Assad dynasty and Iran's quasi-Bolsheviks? It doesn't make sense.
If there are strong pro-Iranian forces in his government, military and intelligence apparatuses that might threaten the Assad dynasty in case of full U.S.-Syrian cooperation, President Assad should send a message to the British or the Americans explaining his situation and avoid the appearance of being engaged in a double game. At the end of the say, President Assad needs to make a choice between the West and Iran. Like they say, a man is judged by the company he keeps.
In Iran itself, differences of opinion among the members of the ruling hierarchy have recently shown up when Iran's state-controlled newspapers published scathing criticisms of President Ahmadinejad's policies, accusing him of jeopardizing the security of the Islamic Republic through his reckless policy decisions on the Iranian nuclear issue. Obviously, his confrontational, anti-U.S., rhetoric has become a cause for concern among some important people in Iran.
Despite what some people have said about how sanctions don't work and how military pressures don't work, history tells a different story. Properly exercised, these may very well have a chance to work. As to some commentators' warning that U.S. military pressures will help rally support for Ahmadinejad, the best argument against it is the fact that, under U.S. military pressures, he has lost support even among the Iranian hierarchy.
Admadinejad may get a bunch of ignorant Iranians to hold mass rallies to show he has popular support. But for that matter, Saddam Hussein enjoyed even bigger mass rallies. When U.S. missiles started to fall on Baghdad, those mass rallies counted for very little. When U.S. troops entered Baghdad, large crowds came out to celebrate his downfall. Popular support?
U.S. military pressures should serve as a wake-up call for any Iranians willing to consider the serious consequences of a military confrontation that Iran can't afford. To draw a historical parallel between the former Soviet Union and Iran is one thing. To put an equation sign between the two is another. Iran is not the Soviet Union. Iran is much weaker militarily.
According to former National Security anti-terrorism officer Richard Clarke, Iran has huge terrorist capabilities and if attacked by the U.S. would retaliate against U.S. interests. While that possibility cannot be ruled out, how effective Iranian retaliation would be is unclear.
Colonel Gaddafi had terrorist capabilities but didn't or couldn't or dared not retaliate when attacked by the U.S. in the 1980s. Saddam Hussein certainly had terrorist capabilities and did order his military and terrorist apparatus to retaliate against the U.S.-led invasion but was soon driven into in a hole where he was captured. Syria is a state sponsor of terrorism, but it just bit the bullet when attacked by Israeli warplanes recently.
My guess is that should U.S. guided missiles destroy Iran's missile launching-pads in a preemptive attack, Iran's ability to retaliate might be limited and its vulnerabilities well exposed. Should Iran dare to retaliate in a substantial manner, it would bring on further U.S. attacks, resulting in the total destruction of the Iranian regime.
That may be the reason why certain important Iranian personages view Ahmadinejad's hardline mumbo-jumbo as dangerous nonsense. They may have a good knowledge of Iran's vulnerabilities and so are very concerned about possible U.S. military action against Iran, as is evidenced by the criticisms of Ahmadinejad in the official Iranian press.
December 2, 2007