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SRA Commentary: Killer Pork

http://www.sandersresearch.com - Sanders Research Associates

SRA Commentary: Killer Pork

By Chris Sanders
June 9, 2003

While modern war becomes increasingly swift and deadly, and the means by which it is waged increasingly complex, the intellectual level of those entering the armed forces could well be on the wane.

- Norman Dixon, On the Psychology of Military Incompetence, London, Futura Publications, 1985, p. 20

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President Bush, social butterfly

The G8 summit was portrayed in the usual circles as a success for American diplomacy. This conclusion is apparently based on the idea that the Americans came with an agenda and had another party to go to afterward. That agenda was to sign up the other industrial countries to the War on terror, with a declaration that proliferating nuclear regimes such as North Korea and Iran had better stop it or else. The rest of the industrial world duly went along. In other words, talk is cheap, but meaningful collaboration with the American program is something else. Russia has not backed off one inch from its nuclear collaboration with Iran, and the US is still locked in a stalemate with North Korea.

The other party that President Bush was off to was the Middle East, where he did a short tour promoting his 'Road Map for Peace'. The usual hosannas have been raised to the President for involving himself in the Palestinian problem, the judgment presumably being that no one, not even Ariel Sharon, can say no to the American president. This is of course nonsense; Sharon has been saying no to American presidents for most of his life, even while saying yes. He has said yes to every American peace initiative while at the same time busying himself burying them. The bulldozers that are building Israel's new security wall have not slowed for a moment in their task of cutting off the Palestinians from yet more thousands of acres. There will be no peace, only a smaller and smaller concentration camp on their own land. There will be no legal challenges in Israeli court. The destruction of land records during the Israeli occupation has taken care of that.

It is consequently hard to see in what sense the G8 summit was an American success. Never at a loss, the usual suspects have not been slow to suggest that it was a European failure, the implication being that their failure is America's accomplishment. "No one spoke for Europe" is the refrain, but like much of modern pop culture, it's catchy, but not too meaningful. It is perhaps true that no one spoke for Europe, but the core European countries have nevertheless been busy in recent weeks. They have set up their own military command and control structure, announced a contract to purchase a heavy airlift capability from Airbus, launched an unmanned mission to Mars, and are pushing ahead forthwith with Galileo, an orbital positioning and navigation system that will free them from dependence on the American GPS system.

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Spending more to achieve less?

This is about as subtle as a finger in the eye. Germany and France are achieving strategic independence.from the US by challenging the US military monopoly on near space, and are acquiring the strategic airlift capacity to project force rapidly to distant points on the planet surface. The Pentagon will not be at all happy with this, being of a mind to tell people what to do rather than to persuade them. Strategically, America's all-or-nothing policy is accomplishing what neither Napoleon nor Hitler were able to do, which is to forge a unified European power.

The US for its part last week announced a major change in its international military deployments. In Europe, it is shifting its troops and bases east to Poland and Rumania.

It is the Far East that the US is making some truly radical changes. It has announced plans to close its bases in Okinawa and Korea and to redeploy to the Philippines and possibly even Vietnam. This is a stunning development that the Pentagon has downplayed. The official line is that this makes sense because the nature of the global threat faced by America has changed. This is presumably in reference to the War on Terror. But in fact this makes no sense, and the lie is given in a look at the proposed US military budget for the next fiscal year, which envisions more large increases in spending on conventional and nuclear tactical and strategic weapons systems. In other words, the US is reinforcing its regular, not its irregular warfare capabilities.

Many believe that the US should not spend money in this way, and the administration has come under fire from diverse quarters. It is criticised for not focusing on the threat from AlQaeda, for instance, which is imagined to be the biggest danger facing the country. The operative assumption here is that the end of the Cold War has ended the need for weaponry appropriate to confront an enemy of the calibre of the Soviet Union and that international terror has increased the need to spend more on intelligence and special operations. For our part, given that the US already spends more on intelligence and special operations than most countries spend on their entire security establishments, it is hard not to detect the hand of bureaucratic competition in all this. The budget is consequently criticised by those who see this as just another blatant round in the game of Killer Pork, the intent of which is to further enrich the already rich arms manufacturers. And it is criticised by those who think that at best the increased spending is not improving America's military readiness, and at worst is reducing it.

Of these points of view, we have a great deal of sympathy for the second two, and none at all for the first. The corruption of the US armed forces and the corporations that supply them is so well documented that it is astonishing that it passes with scarcely a murmur any more. AlQaeda is a different matter, but one that is also surprisingly well documented in the public domain. It was created by US intelligence in the first place to fight the Soviets in Afghanistan, in much the same way that Hamas in Palestine was originally funded and supported by Israel as a counterweight to the PLO. Both have supposedly turned on their sponsors, which may be true, but equally may not be. AlQaeda is routinely referred to as a "shadowy" organisation: decentralised, loosely formed, ready to spring up anywhere anytime with incredibly disciplined, coordinated and destructive consequences. In my view this is akin to belief in goblins and an affront to the gift of rationality with which we have been blessed by our Creator. It does however serve a useful strategic purpose as the sleight of hand that distracts the crowd from the tricks of the magician.

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Sleight of hand

The trick, in this instance, is the strategic occupation of the production centres and transportation choke points for the global trade in petroleum and natural gas. Redeployment to Southeast Asia makes absolutely no sense at all unless the point is to concentrate US forces nearer to the oil fields of the Indonesian archipelago and the South China Sea. Even moving US forces to Poland and Rumania can be understood in this fashion. The only conceivable strategic point to this is the control of Western Europe's pipelines from the oil and gas fields of the former Soviet Union that cross Poland, and the newer pipeline from the Black Sea from transhipped Caspian crude.

The trick is necessary because the US economy is already groaning under the burden of its mismanaged and bloated military industrial sector. This is the real threat to US national security, not some shadowy group of Muslim bogeymen with superhuman tactical and strategic acumen. Under no circumstances can the national debate be allowed to focus on this, still less can it be allowed to examine an analysis of the American political economy based on power instead of wishful thinking.

We do not doubt the preponderance of American firepower, it is just that it is expensive and becoming more so. The US has exported so much of its manufacturing capacity that it cannot readily support the political consequences of being cut off from the foreign manufactures it needs or the inflationary and growth implications of a return to external equilibrium. A restoration of equilibrium implies a sustained effort over years to increase net exports, which implies higher savings and the revitalisation of the civil industrial sector. This is very difficult to imagine happening, the more so because of the interests that have entrenched themselves over the last sixty years.

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Abnormal premia

But quite apart from this, the implications are quite significant in the short run too. We think that there is very little chance that the reservists called up for service before the invasion of Iraq will be returned to civilian life anytime soon. On the contrary, with the prospect of war with Iran rising the probability is that more reservists will be called up. This has significant implications for the labour market, while the implications for the budget and for the external accounts of the country are for both deficits to get bigger before they stabilise, never mind shrink.

This makes the focus of many analysts on GDP growth seem rather beside the point. With war production rising and housing demand still buoyant thanks to still lower interest rates, higher real GDP growth is certainly achievable in the near term. The price, however, will be the worsening of both deficits. This is surely what is on the mind of the corporate insiders who are selling stocks at a rate not seen since the last big market declines. The only cure on offer from the American government for what ails the US economy is more of the same policies that created the problem in the first place.


For now the market seems to have the bit between its teeth and to be in a mood to run. Last week's price action saw it break out of the downtrend in place since 2000, and a run back up to 1100 or so does not seem to be out of the question. With an election to win next year, the chances of a change in monetary policy significant enough to derail stocks seem remote. The reduction in the tax on dividend income and capital gains to 15% adds a further income fillip to stock purchases for investors, pushing the after-tax return on five year treasury notes below the after tax return on stocks. This is pretty heady stuff, not seen since the late 50s..

This may explain too the divergence that has emerged this year between the relative out performance of value stocks over growth stocks on the one hand and the overall market price action on the other. The growth to value ratio has been a good indicator of market direction in the past, but a significant change in the dynamic of equity demand is implied by the shift in the relative income between stocks and bonds.

All that being said, this is not a return, as some analysts are suggesting, to a "normal" equity risk premium over bonds, such as prevailed in the markets until the late 50s. It is sobering that it is taking essentially free money to support the stock market, and even more sobering that it is government policy to support the market when it sports a price earnings ratio of 35.

When you think about it, that is really no policy at all. It is just market manipulation.

ENDS


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