A Joy of the Season

Perhaps my favorite part of the Christmas season is receiving cards or messages from old friends. For me this includes news from my favorite bars in the different cities I have lived: The Green Room in Durham, NC, Porters’ Pub in Easton, PA, The Old Hack Pub in Brussels, Belgium, and The Bombay Bicycle Club in San Antonio, TX. The BBC is a great place, located in Brackenridge Park near the zoo, especially to meet a truly wide range of people. I used to frequent there when I was teaching at the nearby university. I recently received news of the regulars from the owner Bill, who also asked me the following question:

When do you think Israel will bomb Iran? I want to buy some oil futures as a hedge against high gas prices. Your thoughts

What follows is my response to Bill.

Dear Bill,

As you well know my academic background you cannot expect a simple answer to any question. So first I must digress to consider economic theory and history. The vast majority of people who call themselves economists are actually educated and paid to serve the interests of particular elite groups; i.e., the state or those who control the state. This has happened to other kept professional classes, exemplified by the long history of court historians, and more recently by climatologists. The elite class that makes up the state has, through many modes, but most successfully in the modern era through monetary inflation, parasitically lived off of the general population. It has been the task of the economists to make the people believe that this robbery has been for their own good. Economics is thought to be more complicated and mathematical because the purpose of so-called economics is to obfuscate, not to explain truth.

There is one school of economics, the Austrian, that does search for truth, as exemplified by its great champion, Ludwig von Mises (Anna’s middle name Louisa is in honor of Ludwig). One of the fundamental premises developed by Mises (and others in the Austrian school) is that the business cycle, the boom followed by the bust, is generated by excess credit in its many forms. Put simply, the government creates credit (or money directly) to maintain power for itself or to enrich its cronies; think military industrial complex, Wall Street, medical industrial complex, big agriculture (e.g., the Texas mohair interest), etc. The new money creates bubbles in various parts of the economy that must eventually collapse because they are not based on the reality of scarce resources. This process of boom and bust based on the false information for the economy in general enriches the connected elite and impoverishes the people. At the end of the process the currency collapses (most recently Zimbabwe), taking much of the distribution of labor in the economy with it. Mises called this late stage the crack-up boom.

We, the US and to some extant the world, are in this late stage of a cycle that could be said to have begun with the creation of the Fed in 1913, the final break with the gold tether of reality by Nixon in 1971, or the Greenspan-Bernanke great moderation bubble of the last 20 years or so. What comes next and when? The enormous theft and almost existential uncertainty (see Higgs on this critical point regarding the real economy) guarantee difficult times ahead. One Austrian school camp calls for a continuing depression that will result in mass deflation. Others see the Fed and other world central banks continuing their coordinated monetary inflation to overcome the deflation of the bust. I am very pessimistic regarding the economy. Whichever way the monetary systems goes, the real economy is, and I believe will remain, in a shambles; and because of the government response to the crises, will remain so for years to come, perhaps even decades. Japan has been in a recession for over 20 years. Argentina was a wealthy country at the beginning of the 20th century. The key concern is the status of the dollar (and closely related Treasury bond prices) in the coming months. I believe there will be another crisis, perhaps the bombing of Iran, but perhaps more likely another large failure of a financial institution that will initiate flight from the dollar. When the dollar loses reserve status the world will work in a different way.

Finally I will address your question more directly. I totally agree with your premise that the government wants to bomb Iran. First of all there are the sociopaths like Lieberman, who just like war and killing Muslims, no matter the American soldiers killed, the vast treasure wasted, and the various forms of blowback like terrorism. The majority simply see the political or economic profit for themselves no matter the consequences. Throw oil and Israel into the mix to amplify all of the forces pushing for war. Perhaps war profiteering is not the oldest profession but it has been around a long time. However, the world economic system based on only the fiat dollar is the foundation of the hyper-power status of the US. If, I think when, that changes the empire in general, and adventures like Iran specifically, will become untenable. I hope all of this will play out nonviolently similar to the end of the Soviet Union. But just as well, there may be a desperate attempt to keep the people distracted with more war (i.e., wag the dog). Will the bombs drop before the dollar bombs? I am terrible at market timing in general, let alone a geopolitical-economic question like this. But long term, I certainly believe a commodity like oil is a good direction for investment. However, for me it is more important to protect yourself from the dollar decline and to protect capital. The best protection for me is through gold, though I have also put money into general commodity funds. Timing and particulars of investing in oil are too complicated for me. Perhaps with the many bar patrons in the oil business you might get the best information.

To conclude, Bill you have run a successful bar for about 30 years, thus you understand people and utilizing scarce resources; these are the essence of economics. The best place to learn more about the basics and applications to the current situation is LewRockwell.com. Lew Rockwell is the chairman of the Ludwig von Mises Institute, located in Alabama, critically far from Washington. Bill Bonner at the DailyReckoning.com website and Justin Raimondo at Antiwar.com are both entertaining writers and likely to give you better information on the timing of the coming events than anyone else.

Cheers, Ira