by Gary North
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.
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
Copyright © 2006 LewRockwell.com