When I got back from my excursion to the Far East in late 2004 and sat down at my desk in London to write up the story, I emphasised three major trends that would create danger and opportunity for investors.
First, the bull market in energy (oil, gas, electric, nuclear) was going to be one of the longest and strongest you and I would see in our investment lifetimes.
The big drivers are the growth in demand from China and India. Since then, of course, we’ve seen how Peak Oil – the exhaustion of all of the world’s cheap, easily recoverable oil – is driving up energy prices even higher and faster than I thought, and also has complicated things geopolitically.
Second, the general rise of Asia into the developed world was causing huge demographic and economic dislocations – and creating enormous investment opportunities as Asian economies began to consume as well as produce, to spend as well as save.
Third, I wrote that the rise of the East was accompanied by the simultaneous collapse of the ruling currency regime of the last 30 years – the dollar standard. This last point is still so inconceivable to many people that they refuse to entertain the possibility. Too much would have to change. Too much wealth would be destroyed. Too many vacations would have to be cancelled. Yet the inexorable rise of gold shows that this revolution in money is slowly but surely eroding the imperial dollar’s status.
The current situation with Iran doesn’t change any of those three main trends. It accelerates them, however, and adds the dangerous new element of nuclear holocaust to the table.
Let’s be clear about one thing, though: Even if Iran developed a nuclear device tomorrow, it would not likely be the sort of thing they could put on a missile and fire off to Tel Aviv…or Rome…or London. It would be a large, unwieldy thing that they might be able to put on a jetliner. (Incidentally, Iran recently announced the resumption of commercial flights to the United States.)
Still, it’s not a secret anymore what Iran is trying to do. The question is, can anyone stop it?
Another question is does everyone really want to stop it? I would argue that both China and Russia, though they might be deeply uncomfortable with having a nuclear Iran, see it as an enormous strategic blow to the United States and a key element of their respective energy alliances with Iran. China and Russia, in other words, are more than willing to let the world’s nuclear club expand. Doubtless, they feel like they’d have some measure of control over Iran, especially since both countries have helped Iran with its weapons program. Whether they will have any control or not remains to be seen.
So let’s leave aside all the speculating about if the United States or Israel can or will attack Iran. I have no idea. Nobody does. In analysing the whole situation, I found it useful to head to the bookshelf and dust off a copy of Paul Kennedy’s ‘The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500– 2000.’ I’m going to quote from a few sections that I think help explain how what’s playing out across the globe today is a result of both globalisation and Peak Oil.
Unfortunately, if we follow Kennedy’s analysis, it’s very bad news for us who fail to understand what’s motivating our main economic and strategic competitors. Emphasis added is mine. In the introduction, Kennedy writes:
“The triumph of any one Great Power in this period, or the collapse of another, has usually been the consequence of lengthy fighting by its armed forces; but it has also been the consequence of the more or less efficient utilization of the state’s productive economic resources in wartime, and, further in the background, of the way in which that state’s economy has been rising or falling relative to the other leading nations, in the decades preceding the actual conflict. For that reason, how a Great Power’s position steadily alters in peacetime is as important to this study as how it fights in wartime.”
If you date the war on terror to its beginnings, you could conceivably go back to the Iranian hostage crisis of 1979–80. But let’s use Sept. 11 as our start date.
Since that time, how efficient has today’s Great Power – the United States – been at using its productive economic resources? Not very, as I have mentioned ad nauseam. That’s because America continues to consume more than it produces.
Debt has driven a boom in American consumption right alongside a war that doesn’t seem to interrupt the daily life of many Americans. If countries rise or fall based on the efficient use of productive economic resources, then China, with its 9.9% growth, is rising and America, with GM’s $8.6 billion loss last year, is not. America has been falling relative to China and India for the last 10 years. Kennedy continues:
“The relative strengths of the leading nations in world affairs never remain constant, principally because of the uneven rate of growth among different societies and of the technological and organizational breakthroughs which bring greater advantage to once society than to another. For example, the coming of the long-range gunned sailing ship and the rise of the Atlantic trades after 1500 was not uniformly beneficial to all the states of Europe – it boosted some much more than others. In the same way, the later development of steam power and of the coal and metal resources upon which it relied massively increased the relative power of certain nations, and thereby decreased the relative power of others.”
My essay of July last year, ‘The Birth of Cultural Siege Engines,’ made the simple observation that nuclear proliferation would alter the world’s political structure by making it nearly impossible for one country to invade another. Such as it is, this might actually reduce the incidence of war. It might also mean a very nasty but realistic situation where dictators and tyrants are free to terrorise their populations without fear of being toppled by invasion. After all, Kim Jong Il is still ruling North Korea because he has nuclear weapons. Saddam Hussein will be executed sometime this year because he did not.
In historical context, nuclear weapons are the long- range gunships of the Atlantic. They are the great military equalisers. With the technological breakthroughs on the nuclear black market, you can expect more nations to get them. In a strange way, their spread might also dilute their leverage. Once everyone has them, there will be no urgency to get them. Military competition will turn back to economic competition.
This means that the US is less likely to be able to use its military as a means to achieve its economic strategy. True, aircraft carriers and long-range bombers still give America the unique ability to project force anywhere in the world. But a nuclear weapon and the means to deliver it – that’s really an army of one isn’t it? How well will America compete now that its great growth is behind it? And what about China and India?
They will be boosted, in Kennedy’s terms, by the proliferation of nuclear weapons to the extent that global competition will be more economic than military. And of course, resource-rich countries will enjoy the greatest rates of growth and have the largest advantages of all:
“Once their productive capacity was enhanced, countries would normally find it easier to sustain the burdens of paying for large-scale armaments in peacetime and of maintaining and supplying armies and fleets in wartime. It sounds crudely mercantilistic to express it this way, but wealth is usually needed to underpin military power, and military power is usually needed to acquire and protect wealth.”
Here we just find more sombre questions for America and her allies. America’s productive capacity is being systematically dismantled and shipped to China. If you don’t make anything, how can you sell it? And if you can’t sell it
, what will you use to pay for your military? Without the means to generate wealth, how will America maintain its power? By selling bonds to its strategic adversaries? Oh really?
In an energy-scarce, nuclear-abundant world, the surest ticket to wealth, and thereby to power, is energy. Those who have it – Russia, Iran, Venezuela – have tremendous leverage – provided they can survive as nation-states.
Those who don’t – America, the United Kingdom, Western Europe – will find themselves not only less wealthy but less powerful. The free ride to power, luxury, and apathy that the Peak Oil age provided the West is emphatically, undeniably over.
Kennedy writes of this weakening of national power, “If, however, too large a portion of the state’s resources is diverted from wealth creation and allocated instead to military purposes, then that is likely to lead to a weakening of national power over the longer term.” You might add that if states’ resources and capital and their creative energies are diverted and devoted to buying and selling houses and filling them with trinkets bought on eBay, national power is weakened. The consumption lifestyle to which America has grown addicted does not produce capital. It does not produce wealth. It does not produce power:
In the last few years, we’ve seen how the broader “economic and technological changes” of globalisation are making the world more competitive and changing social structures everywhere. Indeed, many of the great social and economic institutions on which the postwar world was built are falling like dominoes…GM, the pension system, the United Nations, the dollar standard…the beat goes on. In fact, about the only thing preventing this migration of wealth and power IS the dollar standard.
It allows America to fund its wars and consumption with a depreciating currency. It is a tremendous advantage Kennedy does not ignore:
“Since the cost of standing armies and national fleets had become horrendously great by the early 18th century, a country which could create an advanced system of banking and credit (as Britain did) enjoyed many advantages over financially backward rivals.”
England survived its many wars with France largely because of the creation of a funded national debt, the issuance of bonds whose interest was paid by the efficient collection of taxes. The modern warfare state is simply not possible without “an advanced system of banking and credit,” and that, for now, is exactly what is keeping the US afloat. The world still wants America’s bonds. China has nearly $800 billion in currency reserves, its resource war chest.
But in the new world that emerges, possession of energy, not a printing press, will be the key to wealth.
First published in The Daily Reckoning, 13/02/2006
Dan Denning is the editor of Strategic Investment, one of the most respected ‘big-picture’ investment newsletters on the US market. A former specialist in small-cap stocks, Dan is also author of 2005’s best-seller, ‘The Bull Hunter.’
Category: Economics