Tossing Greenbacks Into the Tar Pit

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We are told
by the Administration that today’s estimated Federal budget deficit
of $296 billion is a triumph. The decrease is based on rising revenues,
which are narrowing the gap with rising spending.

In short, economic
growth is raising revenues. But can this economic growth be sustained?
The Federal Reserve is now tightening the money supply — actually
shrinking it (May 24 to July 20). If you don’t believe me, look
at the statistics for the adjusted monetary base
, the only monetary
aggregate that the FED controls directly.

At the same
time, price inflation is rising. This is the effect of previous
monetary inflation. The Median CPI, which is the statistic that
I use to monitor the price level, rose in June by .4% over May,
which in turn had risen by .4% over April. Year to year, the figure
is up by 3.2%. This figure is accelerating. It was up by 2.5%, January
to January.

The FED’s present
monetary policy is designed to reduce that rate of increase. The
means of reducing price inflation is to cut monetary inflation.
This policy raises short-term interest rates. Eventually, given
the weak recovery of the economy since late 2001, this policy will
produce a recession. That will end the rise in Federal revenues.
The Federal deficit will expand — this time from the range of $300
billion a year.

An inverted
yield curve occurs when the short rate is higher than the long rate.
This is the single most reliable indicator of a coming recession.
The yield
curve today is almost flat
: a shrinking gap between 90-day T-bills
(rising) and 30-year T-bonds (falling).

The FED is
making one last stand, like Custer, against price inflation. It
is guaranteeing a recession if it does not retreat from this policy
— a policy that can save the dollar by allowing the American economy
and the world economy to sink into recession. Nobody believes that
Bernanke will hold to this policy of stable money when the Dow Jones
Industrial Average falls by 2,000 points.

That is the
home front. Now let’s look at the situation in Iraq.

THE CIVIL
WAR IS HERE

Since May,
the civilian death toll from the civil war has been in the range
of 100 per day. That is for a population of 26 million. A comparable
death toll for the United States would be 1,550 a day.

If, every day,
over 1,500 Americans died from violence related to religious dissention,
we would call this a civil war. But the U.S. government’s unofficial
term is "sectarian violence."

Most of the
reported violence is in Baghdad. By "reported," I mean
reported by the Baghdad morgue. There is violence outside the capital
city, but with Sunni and Shi’ite populations so mixed in Baghdad,
the level of violence is very high there.

There is nothing
like this in northern Iraq, where the Kurds are dominant. But that
constitutes only three of 21 provinces.

The largest
single concentration of our troops is stationed mainly in the Green
Zone, which is inside Baghdad. So, to keep the lid on the violence,
our troops must be placed in harm’s way.

Recently, I
read a first-hand account by a reporter who has been in and out
of Iraq since the late 1970s, Patrick Cockburn (COEburn). He says
that what he has seen in recent weeks is incomparable. On
July 24, he wrote
:

Some 3,149
people were killed in June alone, or more than 100 a day, and
the figure is likely to rise higher this month because of tit-for-tat
massacres by Sunni and Shia Muslims. Some 120 Shias were killed
in two attacks earlier in the week and gunmen yesterday kidnapped
20 employees of a government agency in Baghdad looking after Sunni
mosques and shrines.

The death
toll has risen every month this year and totalled 5,818 in May
and June. This far exceeds the number given by the Iraqi Coalition
Casualty Count, a web site that compiles casualty figures based
on published accounts, which said that 840 civilians died in June.
Overall 14,000 civilians were killed in the first half of the
year says the UN.

That figure
would be the equivalent of 161,500 in the United States. Can you
imagine the state of mind of Americans if Protestants and Roman
Catholics were killing each other in these numbers? We would call
it a return of the Thirty Years War (1618—48), in which half
the population of Germany died in religious war. That was the most
devastating war on civilians in European history.

Now, for
the first time, the health ministry in Baghdad has told the UN
Assistance Mission for Iraq, which publishes a bimonthly report
on human rights, the exact death toll recorded by hospitals around
the country. The central morgue in Baghdad provides figures for
unidentified bodies, of which there were 1,595 in June. In the
first six months of the year the number of Iraqi civilians dying
violently rose by 77 per cent.

United States
troops are sitting on top a cauldron of death, and the heat is being
turned up. A conflict that had been suppressed by the Ba’athist
Party’s secularism can no longer be suppressed.

The Americans
are not part of the religious debate, except insofar as they imposed
a democratic political order that assumes widespread public commitment
to an overriding "live and let live" religious toleration.
Such a policy grew out of the American experience, which in turn
was heavily influenced by the desire to avoid anything like the
German civil war and the English civil war (1642—49).

Such a policy
is being attempted in Turkey, but it has taken since World War I
to impose it, and only at the expense of personal liberty. For example,
no woman may attend a tax-funded university if she wears a head
covering. In Iraq, fashion disputes are handled differently.

The UN report
paints a picture of Iraqi society dissolving under the stress
of cumulative violence. Nobody is safe. A tennis coach and two
players were shot dead in Baghdad for wearing shorts.

According to
Cockburn, the Iraqi State is now getting in on the action.

Assassinations
are often carried out by the security forces themselves. On June
3, for instance, 50 police cars surrounded the al-Arab mosque
in Basra and killed 10 of the 20 people inside.

Within Baghdad,
the violence is unthinkably bad, and it is getting worse.

Baghdad is
now breaking up into a dozen different hostile cities, Sunni or
Shia, heavily armed and living in terror of the other side. On
July 9, Shia gunmen from the black-clad Mehdi Army entered the
largely Sunni al-Jihad district in west Baghdad and killed 40
Sunni after dragging them from their cars or stopping them at
false checkpoints. Within hours the Sunni militias struck back
with car bombs killing more than 60 Shia.

We often speak
of a nation’s infrastructure: roads, telecommunications, electricity,
water. But the real infrastructure is the productive elements of
the population: businessmen, physicians, engineers. It is creative
people who make a society flourish. These people are leaving Iraq.

Many Iraqis
have fled the country, mostly to Jordan and Syria, to avoid the
violence. Syria now has 351,000 and Jordan 450,000 of these refugees,
including 40 per cent of all Iraqi professionals, according to
the US Committee for Refugees and Immigrants.

That would
be the equivalent of about 9 million Americans fleeing the country.

Because of
the traditional division of labor, certain occupations are dominated
by one or another branch of Islam. This is now creating supply bottlenecks.

In many districts
it has become difficult to buy bread because Sunni assassins have
killed all the bakers who are traditionally Shia.

To this is
added the new element of regional violence, the war in Lebanon.

"The
government is all in the Green Zone like the previous one and
they have left the streets to the terrorists," said Mahmoud
Othman, a veteran Iraqi politician. He said the situation would
be made worse by the war in Lebanon because it would intensify
the struggle between Iran and the US being staged in Iraq. The
Iraqi crisis would now receive much reduced international attention.

THE TAR
PITS OF OIL

I grew up in
the Los Angeles area. When I was a boy, I used to ride my bicycle
from my grandparents’ home to the La Brea tar pits. The pits had
not yet become the tourist attraction that they are today.

The pits fascinated
me. Here, the remains of saber-toothed tigers and mammoths had been
dug up. These creatures got trapped in the tar and sank. Their bones
were preserved by the muck. They became valuable showpieces for
the county museum. But, as they sank in the tar, I doubt that any
of them was thinking, "I’ll be a featured attraction someday."
They were thinking, "I’ve got to get out!"

The United
States has constructed over a dozen major air bases in Iraq. This
has been public knowledge for over two years, yet it has received
very little publicity in the major news media. A year after the
invasion, in 2004, this was published on a
Website devoted to global security
.

"Is
this a swap for the Saudi bases?" asked Army Brig. Gen. Robert
Pollman, chief engineer for base construction in Iraq. "I
don’t know. … When we talk about enduring bases here, we’re
talking about the present operation, not in terms of America’s
global strategic base. But this makes sense. It makes a lot of
logical sense."

Brig. Gen.
Mark Kimmitt, deputy chief of operations for the coalition in
Iraq, said the military engineers are trying to prepare for any
eventuality.

"This
is a blueprint for how we could operate in the Middle East,"
Kimmitt said. "[But] the engineering vision is well ahead
of the policy vision. What the engineers are saying now is:

Let’s not
be behind the policy decision. Let’s make this place ready so
we can address policy options."

The problem
is this: The policy options did not include civil war and a resistance
movement that is growing in both numbers and skills.

There is no
indication that the Bush Administration has plans to leave Iraq.
In January, 2009, the Administration will be replaced. The incoming
Administration will then face the enormous problem of what to do
with these bases.

Will our troops
somehow secure them, operating inside besieged perimeters? It looks
that way.

On the other
hand, if the next Administration removes our troops and brings them
home, who will inherit these bases? The national government of Iraq
does not function today. Two and a half years from now, it is unlikely
to exist at all. The civil war will have shattered whatever remains
of the country, itself an invention of the British after World War
I — an invention based on the Brits’ desire to control the allocation
of the country’s oil, and also Kuwait’s, which was another British
invention.

The United
States is the heir to a role that the British decided to abandon,
out of economic necessity, after World War II. That role is the
role of policeman in those areas of special interest to the managers
of the British empire. But the cost of maintaining this empire grew
too great after World War II. They pulled out, leaving a vacuum.
Harry Truman decided to fill the vacuum.

As taxpayers,
we are being asked to maintain whatever remains of order in Iraq.
The military cost of policing Iraq is rising daily. This will escalate
as American troops find themselves more and more the only source
of order, neighborhood by neighborhood, in the middle of an Islamic
civil war.

I realize that
those Americans who think we should pull out the troops will be
accused of cutting and running. But those who make this accusation
have yet to produce any policy that shows how American forces and
American tax money can produce peace in the midst of a Sunni-Shi’ite
civil war. This conflict is rooted in 1400 years of distrust and
the longing for revenge. The Shi’ites’ major public liturgical rite
is self-flagellation with whips, which is symbolic of the sect’s
resentment against the Sunnis.

We have let
two genies out of their respective bottles. They are now at war
with each other. Our troops are caught in the middle.

Now the genies
have moved on to Lebanon, where the Shi’ite Hezbollah has lured
the Israelis into bombing Beirut, a Sunni city with Maronite Christian
elements. The physical infrastructure is now rubble.

Warlords do
not care what happens to the established government. Neither do
guerilla leaders. They are happy to bring down such governments.

The
human infrastructure has departed from Lebanon.
At least 60,000
foreign residents have fled. The government claims that 500,000
people are now displaced from their homes. This, in a nation with
a population of under four million. This is 13% of the population,
the equivalent of almost 40 million Americans.

The scars there
will remain. There will be capital flight. Families that lost their
homes will have to start over. There will be resentment against
Israel. The government has been shown to be militarily impotent.
Soon, it will be bankrupt.

Add to this
the threat of an air strike against Iran. If that takes place, the
spot price of oil will go through $100 in a week — and maybe a day.

The United
States is in the tar pits. Nobody with enough votes to matter has
proposed a plan to show how we are going to get out.

CONCLUSION

You must think
through the implications of a tar pit for the American economy.
I don’t mean the actual monetary expenditure, which is serious,
but only a fraction of the Federal government’s total debt. Think
of the implications for American self-confidence. Most important,
think of this in terms of a training ground for regional terrorists.

When American
forces are bottled up inside the bases, the message to the regional
political leaders is simple: "They
came, they stayed, but those local politicians who relied on their
help are in exile or else dead."

We can see
where all this is headed: a rising price of oil and a falling dollar.

We are already
in the tar pit of the Middle East. To fund it, we have put the reputation
of the American government on the line. Tied to that reputation
is the dollar’s reserve currency status.

If you think
the U.S. will extend its influence across the Middle East, then
commit your capital to dollar-denominated assets. If you have serious
doubts about our foreign policy, find non-dollar assets to buy,
or assets that move up when the dollar’s purchasing power moves
down.

But
beware of the recession in between.

July
26, 2006

Gary
North [send him mail] is the
author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 17-volume series, An
Economic Commentary on the Bible
.

Gary
North Archives

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