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Today’s Reserve Currency = Tomorrow’s Wallpaper |

Today’s Reserve Currency = Tomorrow’s Wallpaper |.

January 10, 2014 | Author 

Today’s Reserve Currency = Tomorrow’s Wallpaper

Somehow, like it or not, the world turns. Today’s hegemon becomes tomorrow’s also-ran. Today’s reserve currency becomes tomorrow’s wallpaper. Today’s cock o’ the walk becomes tomorrow’s dinner.

Hey, we didn’t create this system. We don’t even especially like it. But that’s just the way it is. We’ll come back to this in a minute. First, let’s just note that Wednesday’s markets were losers for just about everyone. The Dow lost 68 points. Gold was down $4 an ounce.

Now, back to our thoughts on money – the same thoughts, incidentally, we’re having at Bonner & Partners Family Office,the family wealth advisory service my eldest son, Will, and I set up back in 2009 to help families hold onto … and pass on … their wealth.

Whether you already have made a fortune, or are trying to build one, you need to be very careful about what currency … or currencies … your wealth in denominated in.

The End of History?

Governments were set up to take control. Ruling elites – by force of arms – established laws, protocols and armies to try to prevent anyone from taking their place.  Their wealth, power and status were to be preserved – at all cost. But in the 18th and 19th centuries, firearms started to become ubiquitous. It was harder for elites to maintain their authority over the masses.

Every farmer on the American frontier had a rifle. A rag-tag band of insurgents in the American colonies (with the help of the French Navy) could defeat the best army in the world. An out-of-work actor could buy a handgun and pop off a president.

Unable to stay in control by force alone, governments had to resort to fraud. Ordinary citizens were allowed to vote on who would rule over them. They were also promised the fruits of others’ labors, if they voted the right way. For a time, it looked as though this new model – social democracies run by flaming politicians and professional functionaries – had defeated all rivals.

The Soviet Union – which had relied on more old-fashioned blunt force to run its slave-driven economy – capitulated in 1989. Maoist China had thrown in the towel, more or less, 10 years earlier when the country’s “paramount leader,” Deng Xiaoping, announced, “To get rich is glorious.” (Historians now claim he never uttered those words. But the phrase accurately captured his vision for China.) And Francis Fukuyama – hallucinating – wondered if the “end of history” was at hand.

If the end of history were at hand, the dollar, the Fed and federal finances would have nothing to worry about. But between history and the greenback, if we were taking bets, we’d put our money on history. Most likely, history will trundle forward. And the renminbi will join (or replace) the dollar as the world’s leading currency sometime before the 21stcentury comes to a close.

But how, exactly, will that happen? No one knows … but few imperial elites give up the No. 1 position without a fight. As they see their power, their status and their wealth challenged, they typically find a casus belli, hoping to stomp the newcomer before it is too late.

 

Thucydides’ Trap

The phenomenon is known to historians as the “Thucydides’ Trap.” Political scientist Graham Allison explains:

 

“When a rapidly rising power rivals an established ruling power, trouble ensues. In 11 of 15 cases in which this has occurred in the past 500 years, the result was war. The great Greek historian Thucydides identified these structural stresses as the primary cause of the war between Athens and Sparta in ancient Greece. In his oft-quoted insight, “It was the rise of Athens and the fear that this inspired in Sparta that made war inevitable.”

 

Note that Thucydides identified two factors: a rising rival and fear of that rise. China is rising. The US power elite fears its rise. And for good reason. Having the world’s reserve currency is an “exorbitant privilege,” as Charles de Gaulle described it. It allows Americans to buy things from overseas without ever really paying for them. Instead, we send over pieces of paper. That paper is then held in foreign vaults as reserves. Or it is lent back to us.

From an economic point of view, the system (established by Richard Nixon in 1971) is loopy. The Chinese pretend they have good customers. Americans pretend they have good credit. And everyone pretends to get richer … based on promises to settle up sometime in the future.

In practice, nobody wants the day of reckoning to come. Because they all know that there are vastly more claims on tomorrow’s output than tomorrow can satisfy. Between 1971 and today, roughly $10 trillion more has been received by Americans in goods from overseas than has been shipped to foreigners. That money is an outstanding claim on US existing wealth and future output.

There is also (with some overlap) about $17 trillion worth of US government debt … also a claim on future American output. And this is just part of the total credit market debt of $55 trillion. (Not to mention the feds’ unfunded liabilities.)

To pay off these claims, the US would have to run a surplus. (When? How?) But instead of running a surplus, we run deficits. The federal government’s deficit, for example, is expected to be $744 billion this year. And the current account deficit is running at about $500 billion. Neither is near a surplus.

 

Edging Toward a Reckoning

Instead of edging toward a reckoning, all major governments seem to want to make the situation worse. The US stimulates its people to buy more Chinese-made goods. And China stimulates its manufacturers to make more stuff for people who can’t really afford it. Both are heading for trouble.

Americans are hooked on spending. They consume their wealth … and more. China is hooked on producing. As it adds productive know-how and capacity, it becomes more and more competitive. Not only can it produce more consumer output at lower prices, but also it can produce the latest in military hardware. It’s a matter of time before that fighting gear comes out. At least, that’s what history suggests.

If there is a military conflict, how will it turn out?

The US spends three times more than China on “defense.” Advantage: Pentagon. But as the Persians discovered in their wars with the Greeks, having the biggest, best-funded army does not necessarily give you an edge. Instead, it invites sluggishness, complacency and overreaching.

The US military is arguably the fattest, most zombie-infested bureaucracy in the world. It suffers from an overabundance of resources. It supports troops (at a cost of $1 million per soldier per year) all over the globe. It builds weapons systems that are often obsolete before they are put into service. It coddles armies of lobbyists, contractors, consultants, retirees, hangers-on and malingerers. Like all bureaucracies, it looks out first and foremost for itself. Looking out for the security of the nation is a distant second.

Its 11 huge aircraft carriers, for example, may be marvelous ways to generate contracts, fees and expenses. They may also be great ways to throw US military muscle into two-bit conflicts around the world. But put them up against a modern, electronically-sophisticated enemy … Then what?

We will probably find out …

 


 

The above article is from Diary of a Rogue Economist originally written for Bonner & Partners.

Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.

 

Violence In The Face Of Tyranny Is Often Necessary

Violence In The Face Of Tyranny Is Often Necessary.

It was the winter of 1939, only a few months earlier the Soviet Union and Hitler’s Third Reich had just signed a partially secret accord known as the Molotov-Ribbentrop Pact; essentially a non-aggression treaty which divided Europe down the middle between the fascists and the communists. Hitler would take the West, and Stalin would take the East. Stalin’s war machine had already steamrolled into Latvia. Lithuania, and Estonia. The soviets used unprecedented social and political purges, rigged elections, and genocide, while the rest of the world was distracted by the Nazi blitzkrieg in Poland. In the midst of this mechanized power grab was the relatively tiny nation of Finland, which had been apportioned to the communists.

Apologists for Stalinist history (propagandists) have attempted to argue that the subsequent attack on Finland was merely about “border territories” which the communists claimed were stolen by the Finns when they seceded from Russia during the Bolshevik Revolution. The assertion that the soviets were not seeking total dominance of the Finns is a common one. However, given the vicious criminal behavior of Russia in nearby pacified regions, and their posture towards Finland, it is safe to assume their intentions were similar. The Finns knew what they had to look forward to if they fell victim to the iron hand of Stalin, and the soviet propensity for subjugation was already legendary.

The Russian military was vastly superior to Finland’s in every way a common tactician would deem important. They had far greater numbers, far better logistical capability, far better technology, etc, etc. Over 1 million troops, thousands of planes, thousands of tanks, versus Finland’s 32 antiquated tanks, 114 planes which were virtually useless against more modern weapons, and 340,000 men, most of whom were reservists rallied from surrounding farmlands. Finland had little to no logistical support from the West until the conflict was almost over, though FDR would later pay lip service to the event, “condemning” soviet actions while brokering deals with them behind the scenes. Russian military leadership boasted that the Finns would run at the sound of harsh words, let alone gun fire. The invasion would be a cakewalk.

The battle that followed would later be known as the “Winter War”; an unmitigated embarrassment for the Soviets, and a perfect example of a small but courageous indigenous guerrilla army repelling a technologically advanced foe.

To Fight, Or Pretend To Fight?

Fast forward about seven decades or so, and you will discover multiple countries around the globe, including the U.S., on the verge of the same centralized and collectivized socialist occupation that the Finnish faced in 1939. The only difference is that while their invasion came from without, our invasion arose from within. The specific methods may have changed, but the underlying face of tyranny remains the same.

In America, the only existing organization of people with the slightest chance of disrupting and defeating the march towards totalitarianism is what we often refer to as the “Liberty Movement”; a large collection of activist and survival groups tied together by the inexorable principles of freedom, natural law, and constitutionalism. The size of this movement is difficult to gauge, but its social and political presence is now too large to be ignored. We are prevalent enough to present a threat, and prevalent enough to be attacked, and that is all that matters. That said, though we are beginning to understand the truly vital nature of our role in America’s path, and find solidarity in the inherent values of liberty that support our core, when it comes to solutions to the dilemma of globalization and elitism, we are sharply divided.

While most activist movements suffer from a complete lack of solutions to the problems they claim to recognize, constitutional conservatives tend to have TOO MANY conceptual solutions to the ailments of the world. Many of these solutions rely upon unrealistic assumptions and methods that avoid certain inevitable outcomes. Such strategies center mostly on the concepts of “non-aggression” or pacifism idealized and romanticized by proponents of Gandhi, Martin Luther King Jr, and the anti-war movements of the 1960’s and 1970’s. The post-baby boomer generations in particular have grown up with an incessant bombardment of the “higher nature” of non-violence as a cure-all for every conceivable cultural ailment.

We have been taught since childhood that fighting solves nothing, but is this really true?

I can understand the allure of the philosophy. After all, physical confrontation is mentally and emotionally terrifying to anyone who is not used to experiencing it. The average “reasonable” person goes far out of their way on every occasion to avoid it. Most of the activists that I have met personally who deride the use of force against tyrannical government have never actually been in an outright confrontation of any kind in their lives, or if they have, it ended in a failure that scarred them. They have never trained for the eventuality. Many of them have never owned a firearm. The focus of their existence has been to hide from pain, rather than overcome their fears to achieve something greater.

There is nothing necessarily wrong with becoming an “intellectual warrior”, unless that person lives under the fantasy that this alone will be enough to defeat the kind of evil we face today.

Non-aggression methods rely on very specific circumstances in order to be effective. Most of all, they rely on a system of government that is forced to at least PRETEND as if it cares what the masses think of it. Gandhi’s Indian Independence Movement, for example, only witnessed noticeable success because the British government at that time was required to present a semblance of dignity and rule of law. But what happens if a particular tyranny reaches a point where the facade of benevolence disappears? What happens when the establishment turns to the use of the purge as a tool for consolidation? What happens when the mask comes completely off?

How many logical arguments or digital stashes of ethereal Bitcoins will it take to save one’s life or one’s freedom then?

Arguments For And Against Violent Action

The position against the use of “violence” (or self defense) to obstruct corrupt systems depends on three basic debate points:

1) Violence only feeds the system and makes it stronger.

2) We need a “majority” movement in order to be successful.

3) The system is too technologically powerful – to fight it through force of arms is “futile”, and our chances are slim to none.

First, violence does indeed feed the system, if it is driven by mindless retribution rather than strategic self defense. This is why despotic governments often resort to false flag events; the engineering of terrorist actions blamed on scapegoats creates fear within the unaware portions of the population, which generates public support for further erosion of freedoms. However, there is such a thing as diminishing returns when it comes to the “reach, teach, and inspire” method.

The escalation of totalitarianism will eventually overtake the speed at which the movement can awaken the masses, if it has not done so already. There will come a time, probably sooner rather than later, when outreach will no longer be effective, and self defense will have to take precedence, even if that means subsections of the public will be shocked and disturbed by it. The sad fact is, the faster we wake people up, the faster the establishment will degrade social stability and destroy constitutional liberties. A physical fight is inevitable exactly because they MAKE it inevitable. Worrying about staying in the good graces of the general populace or getting honest representatives elected is, at a certain point, meaningless. I find it rather foolish to presume that Americans over the next decade or two or three have the time needed to somehow inoculate the system from within. In fact, I’m starting to doubt that strategy has any merit whatsoever.

Second, the idea that a movement needs a “majority” of public backing to shift the path of a society is an old wives tale. Ultimately, most people throughout history are nothing more than spectators in life, watching from the sidelines while smaller, ideologically dedicated groups battle for superiority. Global developments are decided by true believers; never by ineffectual gawkers. Some of these groups are honorable, and some of them are not so honorable. Almost all of them have been in the minority, yet they wield the power to change the destiny of the whole of the nation because most people do not participate in their own futures. They merely place their heads between their legs and wait for the storm to pass.

All revolutions begin in the minds and hearts of so-called “outsiders”. To expect any different is to deny the past, and to assume that a majority is needed to achieve change is to deny reality.

Third, I’m not sure why non-aggression champions see the argument of statistical chance as relevant. When all is said and done, the “odds” of success in any fight against oligarchy DO NOT MATTER. Either you fight, or you are enslaved. The question of victory is an afterthought.

Technological advantage, superior numbers, advanced training, all of these things pale in comparison to force of will, as the Finnish proved during the Winter War. Some battles during that conflict consisted of less than a hundred Finns versus tens-of-thousands of soviets. Yet, at the end of the war, the Russians lost 3500 tanks, 500 aircraft, and had sustained over 125,000 dead (official numbers). The Finns lost 25,000 men. For every dead Finn, the soviets lost at least five. This is the cold hard reality behind guerrilla and attrition warfare, and such tactics are not to be taken lightly.

Do we go to the Finnish and tell them that standing against a larger, more well armed foe is “futile”? Do we tell them that their knives and bolt action rifles are no match for tanks and fighter planes? And by extension, do we go to East Asia today and tell the Taliban that their 30 year old AK-47’s are no match for predator drones and cruise missiles? Obviously, victory in war is not as simple as having the biggest gun and only the uneducated believe otherwise.

The Virtues Of Violence

The word “violence” comes with numerous negative connotations. I believe this is due to the fact that in most cases violence is used by the worst of men to get what they want from the weak. Meeting violence with violence, though, is often the only way to stop such abuses from continuing.

At Alt-Market, we tend to discuss measures of non-participation (not non-aggression) because all resistance requires self-sustainability. Americans cannot fight the criminal establishment if they rely on the criminal establishment. Independence is more about providing one’s own necessities than it is about pulling a trigger. But, we have no illusions about what it will take to keep the independence that we build. This is where many conceptual solutions are severely lacking.

If the system refuses to let you walk away, what do you do? If the tyrants would rather make the public suffer than admit that your social or economic methodology is better for all, how do you remove them? When faced with a cabal of psychopaths with deluded aspirations of godhood, what amount of reason will convince them to step down from their thrones?

I’m sorry to say, but these questions are only answered with violence.

The Liberty Movement doesn’t need to agree on the “usefulness” of physical action because it is coming regardless. The only things left to discern are when and how. Make no mistake, one day each and every one of us will be faced with a choice – to fight, or to throw our hands in the air and pray they don’t shoot us anyway. I certainly can’t speak for the rest of the movement, but in my opinion only those who truly believe in liberty will stand with rifle in hand when that time comes. A freedom fighter is measured by how much of himself he is willing to sacrifice, and how much of his humanity he holds onto in the process. Fear, death, discomfort; none of this matters. There is no conundrum. There is no uncertainty. There are only the chains of self-defeat, or the determination of the gun. The sooner we all embrace this simple fact, the sooner we can move on and deal with the dark problem before us.

 

Putin’s Deal Is No Gift to Gas-Junkie Ukraine – Bloomberg

Putin’s Deal Is No Gift to Gas-Junkie Ukraine – Bloomberg.

Amazingly, tens of thousands of Ukrainians are still braving the winter cold to protest what they consider to be the sale of their country’s future to Russia.

A big part of the deal in dispute was what Russian President Vladimir Putin described as a “fraternal” 33 percent discount on the price that Ukraine pays for natural gas imports. So why aren’t Ukrainians more grateful to their bigger brother? Maybe they have done the math — which shows it really isn’t such a bargain after all.

There are two major elements to the agreement: a $15 billion loan pledge and a reduction in the price of natural gas imports from about $400 per 1,000 cubic meters (tcm) to $268.50. The average price that Gazprom charges to European Union countries for long-term contracts is $370 to $380. So it sounds as though Ukraine will now get a big discount — plus a generous bailout. Not quite.

The gas has to cross Ukraine to get to EU markets, and the $370-$380 that Gazprom charges countries such as Germany includes the cost of that transit. Ukraine charges about $3 per 1000 cubic meters per 100 kilometers. The distance from the Ukrainian border with Russia to the big European hub at Baumgarten, Austria, is about 1800 kilometers. So subtract about $50 from the European gas price to get closer to a true equivalent. Then consider that the EU now has a hub, or spot market price for gas that’s often lower than Gazprom’s. “What I find interesting is that $268.50 isn’t so far off the European hub price, once you deduct transit costs,” says Simon Pirani, a senior research fellow at the Oxford Institute for Energy Studies, who specializes on the gas trade in the ex-Soviet Union.

When Ukraine struck its gas contract price with Russia in 2009, it was under threat of another cutoff of its gas supply, as had occurred in 2009, 2008 and 2006. The thinking behind the new price was that Ukraine should start paying the European price for gas, in exchange for independence. Think of Ukraine as a natural gas junkie, addicted to cheap Russian fuel. Before 2006, this relatively poor country — which has a population of 46 million and an economy 19 times smaller than Germany’s — had been consuming almost 80 billion cubic meters of gas annually. Germany was consuming just under 100 bcm. Ukraine had been paying just $50 per 100 cubic meters for Russian gas imports. So something had to change.

The formula reached in 2009 was index-linked to the price of oil. Three things then happened: The price of oil rose; the EU started to link up its natural gas grids to create a spot market at the gas hubs, independent of Gazprom’s long-term contracts; and demand for gas within the EU fell. Indeed, without a renegotiation in 2010 (Russia got extended naval basing rights in exchange), Ukraine would now be paying $500 per 100 cubic meters of gas.

The reduced price Ukraine pays to Gazprom is still so out of kilter that it is about $30 cheaper to buy gas the EU has imported and transport it back across the border. This re-importing had started to happen on a very small scale from Poland and Hungary. And on Dec. 9, Slovakia’s gas transit company Eustream agreed on terms to reverse the flow in one of its big transit pipes.

With the necessary Slovak capacity, Ukraine might have been able to fulfill the deal it has to buy 10 bcm of gas annually from Germany’s RWE AG. That would represent about a third of Ukraine’s current imports from Russia, which had already fallen substantially because of Ukraine’s declining gas consumption, due to a collapsing economy, coal substitution and efficiency improvements, according to Pirani.

Faced by competition from EU re-suppliers, Gazprom would in any case have had to choose: risk losing as much as another one third of its gas sales to Ukraine and associated political leverage, or else reduce its price by a third to make EU re-imports uncompetitive.

In sum, it’s clear that the $268.50 discount offered to Yanukovych wasn’t as generous as it sounds. Putin in essence agreed to stop extorting money from Ukraine and charge the market price.

So how about the $15 billion loan? Russia bought the first $3 billion of Ukrainian eurobonds as promised just before Christmas, at a coupon rate of 5 percent. Ukraine had an alternative source for a $15 billion bailout loan, from the International Monetary Fund. The interest rate payable to the IMF probably would have been cheaper by 2 percentage points or more.

The difference between the two loans is, again, best looked at in terms of an addict and supplier. The IMF was offering rehab, a painful treatment that would have involved: devaluing the currency; reducing energy subsidies worth about 7.5 percent of gross domestic product; making other budget cuts in areas such as pensions, which account for as much as 18 percent of GDP; and structural reforms.

Russia’s loan was free of known strings, except those that bind a hopeless debtor to his creditor. What the Russian money does better is fund Yanukovych’s 2015 election campaign. Prime Minister Mykola Azarov immediately started announcing how the money will be spent, including increases to the minimum wage, child benefits and public sector pay raises — everything the IMF would oppose.

The IMF loan terms would have been better for Ukraine. The Putin deal is better for Yanukovych. No wonder some Ukrainians plan to take to the streets again to call for his resignation on New Year’s Day, even if their cause appears to be lost.

 

Permanence and the State – Ludwig von Mises Institute Canada

Permanence and the State – Ludwig von Mises Institute Canada.

Engraved outside the National Archives Building in Washington D.C. is the phrase: “This building holds in trust the records of our national life and symbolizes our faith in the permanency of our national institutions.” It’s an uplifting quote meant to channel the spirit of patriotism. It’s also one that is supposed to burn an imprint into the reader’s mind: the state and its behemoth bureaucracies are here to stay.

Monuments of grandeur serve a special purpose. H.L. Mencken once wrote “the average man, whatever his errors otherwise, at least sees clearly that government is something lying outside of him and outside the generality of his fellow men.” This is very much true, and large, menacing buildings such as J. Edgar Hoover Building or the Lincoln Memorial help establish this cognitive divide. By using architectural techniques dating back to ancient Rome, the designers meant to create an aura of endearing superiority for the plebes to drool over.

In a recent National Review piece, Kevin D. Williamson wrote the initial builders of Washington’s various monuments “wanted to show that this new country of free men could hold its head high in the world and stand beside the pomp of any empire.” That may very have been a driving force, but I have a different theory: government monuments are meant to be imposing. But even more than that, they are formed for the purposes of transcending the here and now. If a sense of permanence can be established in the citizenry, there is little standing in the way of perpetual domination. The use of the word “permanency” on the National Archives building is no coincidence. There is no better way to dispel resistance than to perpetuate the idea that it’s futile.

The state, as Rothbard noted, appears to many as “the supreme” and “the eternal.” But that perception is a farce. Very little makes an indelible mark on human history. People are born and die. Businesses start and end. Wealth comes and goes. And states are established and dismantled. None, except for the brightest and most convincing of thinkers, sticks around for very long.

Pulling off immortality would be a great feat for man. But alas, we are born with a set time in the material world. The state’s quest for permanency is nothing but extreme hubris displayed by the most imperialistic of empires. Governments rise and fall all the time. Currently, the regimes in both Syria and the Ukraine risk falling due to civil unrest. In Europe, governments are continually teetering on the brink. Just two decades ago, the Soviet Union collapsed, giving way for a new cronyist form of governance. It was no different from the crumbling of the empires of Rome, Ottoman, and Byzantine.

What truly achieves permanence is not lofty monuments built to worship some all-powerful dictator, but ideas. Mankind’s future is decided on mental battlefields. The very reason we have oppressive governments today is because enough have been fooled to believe that society couldn’t function without them. It’s why public schooling is mandatory in much of the Western world. Get ‘em young, pump ‘em full of tall tales of national glory, and watch ‘em recite the pledge of allegiance until they have one foot in the grave. That’s the tried-and-true formulate for institutionalizing subservience. It’s the Orwellian logic of, “he who controls the past controls the future. He who controls the present controls the past.”

By teaching that monopoly government is eternal, it becomes eternal. The lesson boxes in the thought process of impressionable fellows. It disallows them the ability to conceive of anything different from the status quo. And worse, it ingrains the idea of eternal residing in the heart of national government.

A sloppy understanding of what is really universal follows. No longer are principles seen as defining features for societal relations. Government becomes the focal point of all disputes. Order comes only from the starched-shirt bureaucrat – not from any logical precepts. Discovering the rational boundaries by which humans should live, organize, and govern their actions is the basis of natural law. It is meant to be timeless, applying universally to all humanity. The very notion of an all-encompassing order is a threat to state, which relies on unquestioned obedience. More so, it is threat to the Marxist/progressive theory of ever-evolving laws that replace and duplicate each other on a journey to the end of history.

Even some libertarians doubt the efficacy and truthfulness of permanence in teleological law. In a recent FEE.org debate, minarchist philosopher Tibor Machan wrote, “because none of us is going to live for eternity, none of us can establish anything as timelessly true.” This is the same mindset that decides slavery was once justified, state-enforced segregation was perfectly fine, and unions were a virtuous force in combating excess capitalism. In simpler words, it’s a superfluous understanding of history in relation to logic-based law. What it amounts to is a rationalization of crimes just because they happened in the past. Everything is nothing, and nothing is everything all at once.

Understanding the nature of permanence in relation to government provides insight into how fickle the state truly is. Societies have progressed from despotism to democracy to monarchy to republics. Opinions have changed, elections have occurred, and ruling bodies have been tossed out overnight. No matter how espoused, the sacredness of government eventually unravels. The people are then left staring at the truth: that their leaders are nothing but pompous tyrants.

This tenuous reality was present in the recent public execution of Jang Song-thaek in North Korea. Song-thaek, uncle to supreme dictator Kim Jong-un, was given the death treatment for angering his nephew. The Kim dynasty is supposed to be sacred. Their word is supposed to be God’s. Yet, here a second-hand man by marriage was offed like an injured race horse. In the most tyrannical country on earth, the aura of permanence saw a hole poked through it. In effect, the emperor was revealed to have no clothes, except for some rags of irrational tendencies.

The heads of the state would love nothing more than to wield the force of immortality. It’s a power-trip that pays off financially and mentally. Constructing the potemkin village of surreal authority makes for quick shock and awe. It aides in scaring the citizenry into compliance. But facades don’t last forever, no matter the marble symposiums erected as tribute.

James E. Miller is editor-in-chief of the Ludwig von Mises Institute of Canada. Send him mail

 

The Wages of Fear | Epsilon Theory

The Wages of Fear | Epsilon Theory.

wages1

You don’t know what fear is. But you’ll see. It’s catching, it’s catching like small pox! And once you get it, it’s for life! So long, boys, and good luck.

– Henri-Georges Clouzot, “The Wages of Fear”

 

I must not fear. Fear is the mind-killer. Fear is the little-death that brings total obliteration. I will face my fear. I will permit it to pass over me and through me.

–  Frank Herbert, “Dune”

 

In “The Wages of Fear”, Yves Montand and three other down-on-their-luck French expats agree to drive two truckloads of unstable nitroglycerin hundreds of miles across an impossibly difficult South American terrain. Driving 30 minutes apart so that the destruction of one truck won’t blow up the other, the two teams wind their way across one obstacle after another, facing the constant danger that an unanticipated bump will mean their deaths. One truck blows up in just such an unexpected way, killing two of the drivers in a giant fireball. A third driver is killed in the effort to traverse a final obstacle, a huge pit of oil and muck, but the lone truck and single surviving driver make it to their destination with the deadly cargo intact. Paid double wages … enough to live comfortably for years … and recovered from his exhaustion, the surviving driver must only drive the unloaded truck back to the origination point, where his girlfriend has already started putting together a celebratory party. But living with constant and overwhelming fear has changed the surviving driver’s psyche. He starts taking crazy chances driving the perfectly safe truck home, ultimately taking a turn way too fast and careening to his death in the chasm below. The End.

This is what living with fear does to an individual, a tribe, or a nation … it warps their view of the world and creates massive behavioral change even after the source of that fear is removed. These are the wages of fear, and this is the hidden and awful cost of 9/11 and Lehman’s collapse.

In the immediate aftermath of 9/11, we created a massive NSA eavesdropping and spying apparatus to combat the very real and immediate threat posed by a decentralized terrorist organization that we suspected had significant sovereign sponsors. Today al Qaeda is a pale shadow of its former self, and its sovereign sponsors are in retreat or eliminated. We won this war. Yet we have not scaled back or reduced our spying apparatus. On the contrary, we have created a bureaucratic and judicial structure to support the program, and we are expandingits technical and operational scope to identify and combat potential threats to national security. Why? Because our collective fear of another 9/11 has created a social and political sanction for such a bureaucratic capture. And because these potential threats to national security will always be present, this emergency NSA eavesdropping policy has become a permanent government program with enormous social and economic costs.

In the immediate aftermath of Lehman’s collapse, we created a massive monetary policy program called Quantitative Easing to combat the very real and immediate threat posed by a deflationary spiral as markets seized up. Today there is zero chance of a deflationary freefall with a US epicenter, and we have returned to our regularly scheduled entertainment of a lackluster business cycle. We won this war. Yet we have not scaled back or reduced our QE apparatus. On the contrary, we have created a bureaucratic and judicial structure to support the program, and we are expanding its technical and operational scope to identify and combat potential threats to economic security. Why? Because our collective fear of another Great Recession has created a social and political sanction for such a bureaucratic capture.  And because these potential threats to economic security will always be present, this emergency QE policy has become a permanent government program with enormous social and economic costs.

In the parlance of strategic military doctrine, we have transformed our goals from fighting a responsive war against a specific threat that has injured us to fighting apreventive war against a potential threat that might injure us in the future. There’s nothing inherently wrong or stupid with fighting a preventive war, but it has a very different set of goals and effective social modalities than a responsive war. If this is our choice … fine, but let’s make it an honest choice as opposed to a fait accompli imposed on us by powerful interests. It’s always important to call things by their proper names, but never more so than when you’re fighting a war.

The classic example of a preventive war is the Japanese attack on Pearl Harbor in 1941. Squeezed mercilessly by the coal, oil, and steel embargo imposed by the US, the Japanese leadership concluded that although they would probably lose a war with the US, they would definitely lose the peace. Rather than accept the slow decline of the status quo and the economic constraints imposed by US policy, Japan decided to accelerate an outcome by launching the Pearl Harbor attack.

While there are quite a few historical examples of insurgent or up-and-coming countries like Japan challenging dominant or status quo countries with a preventive war, it’s actually rather hard to find examples of a dominant country starting a preventive war. That’s probably because dominant countries have other policy levers they can pull – like a coal, oil, and steel embargo – to keep the insurgent countries in their place without resorting to war. But we have a very good example of the consideration of preventive war by a dominant country in the internal US debate over how to deal with the growing power of the Soviet Union and China in the 1950’s and 1960’s. By examining the arguments in favor of preventive war (or its close cousin, pre-emptive war) made by some US strategists during this period, and why those arguments were ultimately rejected in favor of a less aggressive policy of containment, we can gain some insights into the risks and rewards of the preventive wars we are currently fighting and why we might prefer a less aggressive approach.

Here’s a snapshot and a few indicative quotes from probably the most effective and outspoken proponent of a preventive/pre-emptive stance regarding US nuclear policy – Curtis LeMay.

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Gen. Curtis LeMay, Air Force Strategic Air Command (SAC), youngest 4-star general since Ulysses Grant, 1968 Vice-Presidential candidate with George Wallace

Killing Japanese didn’t bother me very much at the time. I suppose if I had lost the war I would have been tried as a war criminal. …

 

I think there are many times when it would be most efficient to use nuclear weapons. However, the public opinion in this country and throughout the world throw up their hands in horror when you mention nuclear weapons, just because of the propaganda that’s been fed to them. …

 

That’s the reason some schools of thinking don’t rule out a destruction of the Chinese military potential before the situation grows worse than it is today. It’s bad enough now.

 

It’s easy from our modern perspective to poke fun at how LeMay presented himself with a giant cigar, and it’s very hard to get comfortable with a man who directed the low-altitude firebombing campaign of Japanese civilian populations and who ran on a national ticket with noted segregationist George Wallace. But LeMay was also a brilliant contributor to the US victory in the Cold War. He almost singlehandedly transformed SAC into the most powerful warfighting force in human history (my favorite story is the mock bombing run he ordered on Dayton, Ohio to figure out which of his pilots could hit a target), and it would be a mistake to underestimate his arguments just because we don’t like his politics.

LeMay’s advocacy of preventive/pre-emptive war is based on a very specific utility function –nothing is worse than US military defeat. If that’s your view, that it’s better to be dead than Red, then a preventive attack on a relatively growing Soviet Union or China is an easy call. Far better to strike today, when the correlation of forces (to use a phrase favored by Soviet strategists of the day) were still tilted to the US, than tomorrow when we might not be so fortunate. Because the avoidance of US military defeat was LeMay’s end all and be all goal, he was prepared to “do whatever it takes” including “the killing of a nation” (his words) in the furtherance of that goal.

Anyone who says that he or she is prepared to “do whatever it takes”, whether it’s Mario Draghi and Angela Merkel talking about support of the euro, Ben Bernanke talking about preventing deflation, George W. Bush talking about pursuit of terrorism, or Barack Obama talking about growing the economy … is making a preventive war argument just like Curtis LeMay. Not a preventive war against a particular nation, but a preventive war against some conceptual social ill. Of course, you can’t defeat a conceptual social ill like you can defeat a nation. You can’t accept the surrender of General Deflation. These social ills will always be with us in one form or another, which means that a preventive war in the modern context is a permanent and constant war.

It may not seem like we are on a war footing when it comes to NSA eavesdropping or QE, because the trappings of war … mobilizations, set battles, etc. … may not be present. But the language associated with a war footing is definitely present, and this is what creates the social space that allows these policies to exist and thrive. I am struck almost every day by how the language of extremism and war pervades our domestic political and social institutions, on both the left and the right. I hear the voice of Curtis LeMay everywhere! Unfortunately, I think it’s a voice that tends to promote the wages of fear, and I’m certain it’s avoice that drives game-playing in markets. But it’s also a voice that diminishes as it is identified for what it is, and that’s a pretty worthy goal for Epsilon Theory.

 

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