Geopolitical Order

Geopolitical Order: Crazy Talk, Part II
by Dan Denning
The Rude Awakening
Wall Street, New York
Friday, March 10, 2006

Dan Denning discusses how long the current Geopolitical Order will remain stable.

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Eric Fry, reporting from Lower Manhattan...

Last night, your senior editor, your junior editor and a
couple of other kindred spirits ventured out into the
Manhattan night to share cocktails together. First stop:
Sugarcane, one of "Team Rude's" favorite watering holes.
The mojitos are easy on the palette and the female
bartenders are easy on the eyes...if you're into those
sorts of things.

But tee-totaling females might also enjoy Sugarcane, thanks
to the panoply of flat-screen TVs along the back bar that
display continuous video footage of Brazilian life. Within
the span of a few seconds you might see footage of Pele in
his prime or of Speedo-clad men playing "foot volley" on
the beaches of Rio.

After a couple of hours at the bar, your senior editor
asked to clear the tab. When it arrived he queried his
companions, "Is this right? Did we really have 14 mojitos?"

"No," a member of the party replied, "We had more than
that. The bartender didn't charge us for a couple of
rounds."

"Wow!" your editor exclaimed. "I was expecting a slightly
smaller bill."

"Well you should be happy," a companion replied, "we gave
you a chance to spend your dollars on something of
value...before they become totally worthless."

"Um...thanks, I guess."

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Crazy Talk, Part II
By Dan Denning

If Paul Kennedy is correct, America is in trouble.

Paul Kennedy authored a book entitled, "The Rise and Fall
of the Great Powers: Economic Change and Military Conflict
from 1500–2000." Kennedy's analysis of "great powers"
provides a disturbing context for America's own rise to
power...and her eventual fall.

"The triumph of any one Great Power...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 efficiently has the United States been using its
productive economic resources? Not very, would be the short
answer.

Geopolitical Order: America Falling

Debt has driven a boom in American consumption right
alongside a costly, open-ended police-action in Iraq. 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 1,500 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."

Throughout the 20th century, America benefited
disproportionately from innumerable technological
breakthroughs, not the least of these being nuclear
weaponry. Not surprisingly, the U.S. economy flourished
throughout most of the century.

"Once their productive capacity was enhanced," Kennedy
explains, "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...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.

Geopolitical Order: The Dollar Standard

In the last few years, we've seen how the broader "economic
and technological changes" of globalization 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
fraying around the edges...General Motors, the pension
system, the United Nations, the dollar standard...the beat
goes on. In fact, about the only thing preventing a
complete migration of wealth and power from the West to the
East is the dollar standard.

This convenient currency regime allows America to fund its
consumption – and its wars – 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 America afloat.
The world still wants our bonds.

But how long will this advantage last?

I suspect a lot will have to do with the price of oil. As
oil rises in dollar terms — whether from geopolitical
tension or the growing realization that Peak Oil is real —
the run on the dollar will grow. Hard assets like gold
won't just be fashionable: They will be indispensable to
wealth preservation.

Soaring gold and oil prices will be accompanied by soaring
interest rates and inflation. The convenient fantasy world
where consumer prices don't rise and the dollar doesn't
lose purchasing power will collapse. One day, we Americans 
will wake up and find that the money in our wallets buys
only three-quarters or one-half as much as they did the day
before. The dollar will have lost status. America will have
lost power. And in the new world that emerges, possession
of energy, not a printing press, will be the key to wealth.

Geopolitical Order: A Lack of Sturdiness

The truth is, we have no idea how sturdy the current
social, economic, and geopolitical order is. We only know
that it's changing at lightning speed and that America
seems to be on the wrong side of many important and
powerful changes. Our economy is based on the mobility and
standard of living that cheap oil provides. Our economy is
based on consumption, and not production. Our economy is
based on getting rich through asset inflation, instead of
saving, delaying consumption, and producing products with
added value.

Unfortunately, currencies do not have the option of
retiring gracefully, like Alan Greenspan. They self-
immolate, with a little help from central bankers willing
to stoke the fire with ever more amounts of paper.

Whether by accident or design, America finds itself in
direct military and economic competition with several
countries that aspire to be Great Powers: Iran, India,
China, and Russia. Current economic trends suggest America
is declining just as these powers are rising. The military
trends make it increasingly hard for America to achieve its
strategic goals. And the geologic trends (or fates) show
that it's going to be difficult for America to generate
wealth without energy, or retain wealth as energy gets more
expensive.

It doesn't sound very good, does it? Crazy talk? Maybe. But
I doubt it. There's not much you or I can do about great
matters. But we can manage our money. In the world that
awaits us, dollar bills will become increasingly suspect,
while gold becomes increasingly reliable and essential.

[Joel's Note: So what does this mean for us dollar-
earning/holding folk? For most investors, home equity is a
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is one of the American dreams, right? Make sure you are not
about to fall prey to the biggest investment trap facing us
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factors affecting your major investment right here.

Your home is Worth Less Than You Think:
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[Joel's Note: Today is your final chance to email us with
your favorite alternative energy plays. As always, we are
seeking only mid- to large-cap companies. No small caps,
please. So the suggested stock must have a market
capitalization greater than $500 million. And obviously, no
inside information, please. We will examine the submissions
that we receive over the few days and will provide a
sampling of the best ideas in upcoming editions of the Rude
Awakening. You can send along any thoughts to:

aussiejoel@the-rude-awakening.com

And be on the lookout for a special promotion due out
sometime today form our friends over at Outstanding
Investments...that's about all I can say as far as that one
goes, but you'll see soon enough.

Cheers,

JOEL