The Goldwatcher

The Iraq fiasco

‘President George W. Bush’s decision to invade Iraq in 2003 ultimately may come to be seen as one of the most profligate actions in the history of American foreign policy” according to Tom Ricks, Washington Post columnist and author of the bestseller Fiasco: The American Military Invasion in Iraq. He concludes ‘Democracy may yet come to Iraq and the region, but so too may civil war or a regional conflagration, which in turn could lead to spiraling oil prices and a global economic shock’  The US will probably have combat troops in Iraq for ten to fifteen years.  He is a  contributor to the PBS Film ‘The Lost Year in Iraq’  that relates how the United States reached the predicament it is in.  An on line interview with Ricks recorded yesterday brings his analysis up do date.This terse ten word summary from a military chief in Iraq on the new American chain of command and strategy is worth repeating :  ‘Bottom line -  right people - right strategy - too little – too late.’

The other hard place: Afghanistan

It’s also going to be ten to fifteen years for us in Afghanistan. Word from Sir Sherard Cowper-Coles,  the new British Ambassador is the task of shoring up a government in that war-torn nation will be a “marathon rather than a sprint. ” Britain is establishing a larger embassy in Kabul than we have in Washington. Evidently the Taliban don’t like that idea. News from the Taliban   is they are adopting the strategies of Iraqi insurgents with Kabul in their sights.

The right strategy

Recognise the risks of  civil wars ‘or a regional conflagration that will lead to spiralling oil prices and a global economic shock” with war time economies burdened by inflation.

Russia’s change of fortune and expectations:

What a turnaround from nine years ago when Russia was broke. Now it is rich, booming and flush with money. Russian President Vladimir Putin  has called for a new global financial architecture that accomodates the role of Russia and other fast growing emerging economies.  He wants to dilute the the role of institutions like the International Monetary Fund and World Trade Organisation and argues that current international economic organizations “look archaic, undemocratic and awkward.” The world, he says, is  ’changing before our eyes’ and ‘……countries that yesterday seemed hopelessly behind are today the fastest growing economies of the world……If, 50 years ago, 60 percent of the world’s GDP came from G-7 countries, then today it is the other way around.’ 

Changes in global relationships used to be initiated through formal public organisations like the IMF. But nowadays informal grass roots organisations are often more effective. Putin’s 4000 delegate economic forum in St Petersberg was associated with The World Economic Forum of Davos fame.  Billions of dollars of Russian jetliner orders from Boeing and Airbus closed at the Forum have already eased new cold war tensions.

With foreign reserves of $600 billion dollars Russia has become a major economic power, is the world’s largest oil producer and there is serious muscle behind Putin’s call for a new financial architecture.  According to a June 11^th report from the German Hypoverreins Bank Russia’s GDP is expected to quadruple to $4 trillion by 2030  and might overtake Germany and India. Its currency reserves already exceed those of the Euro block.

Forecasts for dollar dominance and geo-political risks to outcomes:

A recent  survey of World Central Banks controlling $5 trillion of assets conducted by UBS Swiss Bank   finds that in twenty five years they expect 47% of their foreign currency reserves will still be in US dollars, 29% in an unspecified Asian currency and 21% in Euros. But the banks will increasingly invest in higher yielding securities like mortgage backed securities. With current distress in the US sub prime mortgage market only time will tell whether that strategy is going to pay off. Dollar dominance is on firmer foundations. With US GDP already above $13 trillion the law of big numbers works against competitors. Why is gold, not even mentioned in the reports of the survey,  still of importance?

In best case scenarios for the dollar and the global economy and absent any shocks to the system  gold could become irrelevant to central banks. But such benign outcomes can’t be counted on. In a comment on ‘Risks and rewards of the world’s golden era’ ( ‘golden era’ in the metaphorical and not the physical sense) the Financial Times commentator Martin Wolf explains :  ‘The most obvious reason for taking today’s euphoria with a barrel of salt is that nobody ever expects shocks. That is what makes them shocks. If I think back to the noteworthy events of my own adult lifetime, I observe that none of the big events was expected……(including) …….. the Asian and Russian crises of 1997 and 1998 …… People who think they know what is going to happen next are fools. Surprises – or what the brilliant author Nassim Taleb calls “black swans” – are inevitable. Some are likely to be desperately unpleasant.’

Here are some examples of shocks. Only ten years ago Russia was broke  Last week Russia was in the news for new cold war rumblings. This week it is in the news for boom times and big spending. As investors we have to think about next week, the next weeks, the next years and ‘unexpected shocks.’    44% of the Central Bankers surveyed by  UBS identified geopolitical risks as the greatest threat to financial outcomes. Putin has been speaking out on the theme of the US having overstepped its borders and the need for a new world order to ensure security and prosperity for all. We may or may not agree with him. But we can dialog with him. Unlike those who menace our security in regions where extremists rule and there is no one to speak to.

Dangers if the US abandons Iraq now: 

A commentary on Iraq published in yesterday’s Wall Street Journal quotes foreign-policy “realists” who have in the past counselled President Bush against regime change; “moderate” Sunni Arab Governments; and the U.S. intelligence community all warning of the dangers of leaving Iraq in present conditions.

General Brent Scowcroft, United States National Security Advisor under Presidents Gerald Ford and George H. W. Bush, openly opposed the war from the outset and has been sceptical of the President’s democracy-building agenda. In a recent Financial Times interview he has summed up the consequences of withdrawing now: “The costs of staying are visible; the costs of getting out are almost never discussed. If we get out before Iraq is stable, the entire Middle East region might start to resemble Iraq today. Getting out is not a solution.” Retired Marine Gen. Anthony Zinni,  another vociferous critic of the administration’s ‘naïve’ policy in Iraq and the broader Middle East takes a similar view : “When we are in Iraq we are in many ways containing the violence. If we back off we give it more room to breathe, and it may metastasize in some way and become a regional problem….. We don’t have to be there at the same force level, but it is a five- to seven-year process to get any reasonable stability in Iraq.”

A senior Gulf Cooperation Council official is quoted as saying: “If America leaves Iraq, America will have to return……(and) will have to stabilize more than just Iraq. The warfare will have spread to other countries, governments will be overthrown. America’s military is barely holding on in Iraq today. How will it stabilize ‘Iraq Plus’?” (Iraq Plus is the term that some leaders in Arab capitals use to describe the region following a U.S. withdrawal.)

Is this the last chance to prevent catastrophic failure in Iraq?

In January 2007 Kenneth M Pollak, a noted expert and commentator on Iraq discussed the question whether George Bush’s new plan could stop the rot. He wrote : ‘If you could set aside the President’s usual off-key rhetoric about the threat of terrorism and the importance of freedom, the plan he outlined for Iraq isn’t bad at all……….That said, any outside observer must have at least three important reservations. First ‘It may be too late. Civil wars are born of dangerous psychological dynamics that can be difficult to stop once they have started’……. Second, acknowledging that the replacement of Donald Rumsfeld with Robert Gates and the succession of Lt. General David Petraeus to the command of all Coalition forces in Iraq does offer some hope, even if they ‘deliver a brilliant performance (and they may well), without a commensurate civilian effort to deliver the political, economic, diplomatic, and social components, the plan will still fail. …….’ .(And) Third ‘We have heard it all before. This is not the first time that the Bush Administration, or even the President, has gone before the nation, admitted to making mistakes and promised to change direction’ Pollack concludes : ‘ it is surely our last chance to prevent catastrophic failure in Iraq. And that would be disastrous, not only for the Iraqis, but for all of the people of the Middle East, and likely for all Americans as well.’

And if there is a catastrophe? Wherever we are the rest of us will also feel the pain.

Will the  Russian risk dwarf Iraq?

The celebrated writer, former editor of The Times and columnist Simon Jenkins wrote in today’s Guardian ‘Will history tell us we were fools? We worried about the wrong war and made the wrong enemies……(and) neglected the great strategic challenge of the aftermath of cold war: the fate of Russia and its mighty arsenals, … The result was a new arms race and, after a Kremlin coup, a new war. Is that the path we are treading? ‘……….

‘A strategic risk is being taken with Moscow, and therefore by Moscow in return. Who knows that the Iraq war may seem a footling incompetence alongside the ‘ misjudgment of Russia over the past decade?…………. Following cold war with cold peace may yet prove a historic error. And it was gratuitously unnecessary.

China dwarfs everything else:

Iraq and Russia support the ‘bad’ case for holding gold. Risk insurance. Dynamic growth in China supports the good case. Surging grass roots demand. US Global Investors Webcast ‘The Rise of the Chinese Consumer’ Part Two will be broadcast tomorrow at 3.30 p.m. CST. Anyone can register for the on line presentation and address questions and recorded webcasts are usually accessible for a few weeks after broadcast.