November 18, 2003
After 9/11, but before the Iraq invasion, Donald Rumsfeld, the US Secretary of Defence, asked the Military leaders of the Pentagon to "think the unthinkable." A thing that is 'unthinkable' would seem a muster more difficult than most military men may manage, since logically it is impossible. Let us assume that Rumsfeld meant they should begin to think in ways previously considered outrageously irregular, even for the multi-muscled military mind.
The unthinkable, as a subject area, must include a worldwide soccer field for combat, created entirely from the virtual and abstract computers of the Pentagon, including national entry into a fifty year war on executive orders, without any formal declaration, and absent any sign of a defined enemy. In giving his orders, Rumsfeld might have swung his pointed fingers in a complete circle, saying, "There they are ... go get them!" The Generals complied, as best they were able, though many have since gone to retirement with purple shame painted on their bonnet.
But it is not the foolishness of Rumsfeld that is so problematic and worrisome. Objective onlookers of the current insane behaviour of the US see the blind support of Israel, the US appearing as a simple-minded giant of a moron that acts as a protecting ally to a brutal and selfish midget. To the US Treasury, Rumsfeld's boastful bravado means that ways must be found to finance such ambition. While US behaviour around the world is understood as the consequence of having elected political leaders who exhibit a sad case of basic stupid, whether this is actually true or an act does not affect the likely outcome of their decisions.
Soothsayers predicting the future accept the fact that past efforts have largely failed. For this reason mainly, no attempt is made here to predict the future. It is possible however, to point to a cliff that one sees directly ahead, and to suggest that if the present velocity is maintained, there will be little chance to avoid what going over the cliff entails. Velocity, unlike speed, includes direction as well as rate, and we thus include in the suggestion for caution some of the apparent aspects that adorn the direction of driving, especially those that seem to have potential for being unthinkable.
The US has a public debt that approaches USD 7 trillion. The present budget spends USD 500 billion more than is expected to be collected from taxable sources. About half of this deficit is to be covered by selling new bonds to foreigners. The foreign bond buyers already hold significant amounts of US bonds, and thus they have a strong interest in keeping the US financially solvent, and the dollar strong, while they figure out how to get their capital back, along with the agreed interest. In today's financial climate, the major foreign holders of US bonds are Japan, Taiwan and China. They have a legitimate concern that the US may be over-extended. They would like for this risk to be reflected in an increased interest rate. Until it is, they are likely to be less aggressive bond buyers. On the quiet side, they may be expected to divest themselves of what is clearly a declining asset with the continuing fall of the dollar.
But an increase in the interest rate is impossible, because the US economy is not healthy just now, and the number of employees without work continues to increase. Other countries, such as Australia and New Zealand, are more prudent in their monetary affairs, limiting their defence spending to more prudent levels. They are able to offer higher interest rates when it seems appropriate to do so, and their bonds are thus more attractive on the world market. Their currencies are also attractive, and have enjoyed a steady advance against the US dollar.
For a number of decades the US bonds have enjoyed a high reputation, and are still the benchmark against which the bonds of other countries are rated. A number of countries have defaulted on their bonds, and their governments have required a bailout by the World Bank, the IMF, and large commercial Banks. Now a place appears where Rumsfeld's term is appropriate. It is considered 'unthinkable' that the US will ever default on its bonds, being unable to pay the agreed interest when due, or to repay the principal on the maturity date.
The US is able to sell bonds at auction every two or more weeks, at low interest rates, and the number of bidders has so far exceeded the amount of bonds offered. The question, however, is whether the bi-weekly sales will continue to attract sufficient interested bidders, and whether the current rates will be forced up, even without inflation, in order to attract the more risk-averse bidders. It is clear that current US bond sales are being used to pay existing interest, and to retire old bonds as they fall due. This is not the preferred purpose of national bond sales.
When a country sells bonds, it does so in order to fund infrastructure, or invest in local industry. Once a country becomes heavily indebted, it is trapped in a revolving scenario, having the necessity to sell new bonds in order to pay interest on the old ones, and to retire them as they fall due. Such a country is given counsel to restrict its expenses, reduce its budget, and become more conservative financially. It is not expected to continue in a situation of large and prolonged budget deficits.
As much as the world fears the consequences of a US default, the fact is that such an unthinkable eventuality lies in the road ahead, like a cliff in front of a speeding vehicle. While the US may never default on its bonds, a past Secretary of the Treasury, Mr. Rubin, tactfully advised that caution is advised, since "there will be a price to pay" for these continued large deficits.
The annual US budget deficit, if it is confined to USD 500 billion, amounts to USD 1.37 billion per day of increased debt. In a month, this amounts to USD 41.7 billion of new debt. The cost to service this debt adds to the existing bond interest that must be paid. If an average interest of 5% is paid on the outstanding US bond debt of USD 7 trillion, the amount is USD 350 billion. It increases at a sharp rate, almost 10% per year, indefinitely.
If sales of US bonds are sufficient to cover the USD 500 billion deficit, it is clear that the interest on the total national debt takes up the major portion of the sale proceeds, and the necessity to repay the principal of mature debt requires more. The deficit situation is worrisome, simply because the military expenses of the 'fifty year war' are not known. The enemy has still not been identified, and there is no defined plan of battle. The definition of 'winning' is unclear, and the timetable for reducing the military budget is beyond any reasonable prospectus. It seems more likely the financial requirements for conducting the 'war on terrorism' will increase, not decrease.
The war in Iraq is in its early stages, not coming to a conclusion as announced. The US and its allies have no comprehension of what is happening in Iraq. They have no conception of Islam, and concentrate on the use of excessive force to protect an oil supply priced in US dollars. Saddam Hussein foresaw the fall of the US dollar, and switched to selling Iraqi oil in Euros. That decision brought on the present crisis. As the weakness of the US economy becomes more apparent, more oil producing countries will switch to the Euro, in spite of existing secret contracts to stay with the US dollar ad infinitum.
The US economy is more dependant on crude oil than a heavy drug user is dependant on his daily fix. Presently the US requires five million barrels of crude oil from foreign sources. At the current price of thirty dollars a barrel, that means the US must sell USD 150 million a day to foreigners to maintain a balance of trade in making the required payments. Much of the payment is in the form of agricultural products, and there is a general rebellion taking place in the world today against the subsidies that are paid to US and European farmers to enable them to compete successfully against foreign farmers.
If, for whatever reason, US farm exports should decline, the annual oil payment, USD 55 billion per year at today's rate, will become an unsustainable drain on the US economy. If it should happen that the US can not find enough oil to meet the needs of its economy, or if the world price of this commodity becomes so high that it is impossible to purchase sufficient quantities, the effects on the US and world economy would be unthinkable.
The US wants to reduce the exposure of its military personnel, and also reduce the financial burden of maintaining troops abroad. It is announced that a new government for Iraq will take over next year. Such insincerity is both a dream and a deception. There will be no reduction of US military forces in Iraq, simply because the situation requires their presence to protect the imposed authority. There will be no elections and no democracy in Iraq in the foreseeable future, because the Iraqi's are Muslims, and they want an Islamic government. The US will not allow an Islamic government in Iraq, and therefore the situation is a stalemate.
The talk of a democracy in Iraq is duplicitous, because democracy means the 'people' will be allowed to vote for their preference. There will be no such vote, and every effort will be made to install a military dictatorship, concealed behind a phoney government, just as is done repeatedly around the world. The difficulty, for all concerned, is that now all parties are aware of the deceit, and the American soldier is foremost among them. No country can continue a successful occupation if the indigenous people are solidly opposed, especially if the occupying soldiers have low morale, many favouring the argument of their opponent.
The recent introduction of laser-guided missiles into Iraq and Palestine, signals an end of the use of force to determine geo-political events. The helicopter, tank, personnel carrier and bulldozer are now rendered largely impotent. What this means for the dominant position of the technologically superior West is uncertain, but the inability of a large and superior military force to suppress and intimidate an indigenous people of determination and zeal is an outcome that is unthinkable. The US projects its economic and military dominance to maintain the fiction of its strength and invincibility. It controls a buyer's market, only mildly challenged by OPEC and other oil producing countries. In the middle region are the royal monarchies and military dictatorships supported by the West, and on the bottom are the people. It is unthinkable that this vertical order can be reversed. But the people of the oil-producing countries are following Rumsfeld's orders. They are thinking the unthinkable.
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