..."My concern is investment strategy...We must know the character of our leaders if we are to interpret and profit from future trends.
Yes, we know some things about Bush. What can we conclude about the next four years. Budgets will continue unbalanced as the debt rises. This will continue to put pressure on the dollar. Bush started office with a very strong dollar and as a result of fiscal polices has depreciated the value of all assets in the US by 25+%. Every one talks about the Bush Tax cut, but no one is talking about the Bush Wealth Tax increase. Between increasing debt by close to $2 trillion and depreciating US assets by 25% Bush has stagnated growth. Bush lived up to his campaign promise of reversing everything Bill Clinton did. He certainly reversed the direction of the economy and the value of the dollar.
Second we know Bush is a strong backer of pre-emptive action. He is willing to put US troops at risk to protect the US. He is willing to go it alone and ignore the value of cooperation. Is this a good policy? I will leave that to you to decide. But I will tell you exactly where such a policy will lead. We did not see the Iraqi Soccer Team at the Republican Convention. In fact, unlike what I expected we did not see any public display of thanks from the Iraqi people. Why? Primarily because we are viewed in Iraq as creating more problems than we solve.
This perception may be wrong. Maybe it is too soon for the Iraqi people to appreciate what we have done for them. Certainly had Truman attempted to find Japanese supporters of US policy in 1948 or even 1952 he might have had a very hard time. Yet history proved the reconstruction of Japan was the right thing to do. On the other hand, 30 years later we are not going to find too many Vietnamese to come to the support of a US president. US Policy in Vietnam created more enemies than friends.
What we do know is the issue with Iraq will not be solved over night. The Reservists are tasked beyond their duty schedule and have to come home. Bush has reorganized our military around the world in order to back up our troops in Iraq. This is necessary, but as with every action there is a reaction. Removing duty station troops can increase systemic risk – especially in North Korea and possibly even in the simmering Balkans. The majority of the Koreans no long want our troops there, but can they manage the DMZ alone?
Getting to the bottom of Terrorism has not been accomplished by invading Iraq. Terrorist attacks around the world have continued to increase. Following the theory of pre-emption and the “Axis of Evil” it is logical that we spread the area of conflict. Few presidents in history have had the will power to stop short of a war goal and usually see the failure as an excuse to escalate. Given the fact Bush was asleep during Vietnam and looking at the policy of torture in Iraq there is no reason to believe he has suddenly learned something.
The analysis above leaves the way open for further escalation. War is a cost. The only way it feeds GDP is by innovation. We are fighting a low tech ground war in Iraq so very little innovation will result. If we were securing a cheap supply of oil to give the US a strategic economic advantage then maybe GDP would blossom as a result. The latest GDP figures are down and the price of Oil is at record highs. This one fact alone ahead of the election shows poor planning on the part of the administration.
Projecting the scenario out leads one to the inescapable conclusion that shortly after the election Bush will institute a Draft. The bill is already making its rounds through Congress. With a Republican Congress it will pass. The bill calls for Drafting both men and women and does not allow for any deferments other than competing the current college semester. There is no way the US can carry on an expanded fight against terrorism without a draft.
What is the economic fall out of a draft? The first is the cost – bigger deficits. The second is the removal from society the best and the brightest. By even deferring education for a two years period of service we weaken US competitive position and destroy much of the future high tech worker base ten years down the line. At least with Vietnam we encouraged a college education by deferring military service. This made the country stronger with a higher education level. You can argue that many of those who went to college to avoid Vietnam never used their education in a job, but this is false thinking – education is always an economic plus. A carpenter that can write is more valuable than one who cannot.
Finally, the cost of a draft is social unrest. The US does not have a labor surplus. Even with bad economic polices and the Dot Com crash unemployment has remained stubbornly low. Weakening the economy further by high debt and even re-locating jobs through outsourcing is not going to create a labor surplus. As a result labor costs have to rise with a draft. It is young people who work cheap. Remove them from the labor force and labor rates rise. Automation will kick in to mediate this a bit, but inflation is the only outcome followed probably by price and wage controls. While Truman did not see the expected inflation as a result of Korea he still hit the panic button and put in price controls.
Ironically, by implementing a Draft to solve the problem of foreign terrorism we will be breeding domestic terrorism. An increase of domestic violence was the outcome of Vietnam as protestors lined the streets. Some of these people became radicalized and attacked US assets in a misguided attempt at attention. The ability of the anti-Iraq people to draw 150,000 protestors to NYC is an indication that all is not well with the current direction of the country. Add a high tax burden and the rebellion will grow necessitating tighter controls at an economic cost, higher government expenses and lower productivity. The only way to manage higher costs is through higher interest rates or higher taxes. At present Bush has benefited from the “Long Wave” trough with record low interest rates. Even a whiff of inflation is going to drive interest rates up and increase the deficit. There is a limit to how high the deficit can run. We do not know where that limit is, but the only way out after it is hit is much higher taxes.
The rest of the issues can just be dismissed. As was made clear at the convention Bush is going to stay the course and see the war on terror through to its bitter end. There is nothing to suggest a different tact or more cooperation with the rest of the world. There is nothing to suggest conditions in Iraq will in fact improve. The trend of terrorist acts continues to escalate. The only accomplishment has been to lock down the US and profiling possible suspects before they can act. Unfortunately, one of those added to the no fly list was Edward Kennedy, an event suggesting those watching the gates are both not very bright and inflexible.
Eventually as the war on terror continues, the terrorists will become more sophisticated and acquire nuclear weapons. Iran has announced they will begin building a bomb, North Korea probably has a few and Pakistan our tenuous friend is exporting nuclear bomb technology.
I am happy to hear alternative projections. However, from the above interpretation I want to be out of Dollars and the US market for the next term and concentrate on foreign markets..."
Eric Von Baranov - CEO
The Kondratyev Theory Letters |
