The Undeclared War in the Middle East

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This can’t be good. The Associated Press reports that, “Scores of Iranian students have attacked the Saudi Arabian embassy with firebombs to protest the Gulf country’s role in cracking down on anti-government protesters in Bahrain.”

–But first, one way of looking at the emerging events in the Middle East—and this is the way we looked at it last month’s issue of Australian Wealth Gameplan—is that everything is quickly becoming a proxy war between the Iranians and the Saudis. That is a gross simplification, of course, given the local complexities in each country.

–But the main idea is that the modern national borders in the whole region are fairly recent (historically speaking) and fairly artificial. If there was ever a time to re-draw them, now would be it. Surely all the parties with strategic interest in the region (Russia, China, the U.S., former colonial overlords from Europe, various ruling royal families and dynasties and of course major religious groups) see the current turmoil as their best chance in years (or ever) to gain influence or control over the world’s major proven oil reserves.

–The big scramble for proven natural gas reserves is not so surprising in this Middle East long-term oil war context. Of course as we write that this morning the oil price is actually down. The International Monetary Fund cut its growth forecasts for Japan and the United States overnight. This again proves the point that high prices for anything are usually the best cure to curb demand.

–Speaking of curbing demand with high prices, did you see that China reported a $7.3 billion trade deficit in February? Since February follows the quiet period of the Lunar New Year, there is a perfectly logical explanation for why Chinese imports (in dollar value) would exceed Chinese exports. But is there another explanation?

–Yes, at least in the form of a question! What if China’s huge demand for imports (both for food and raw materials for its manufacturing industry) is driving up prices to unsustainable levels? An article in Forbes by Gordon Chang digs deeper into the trade deficit details and finds rising prices are to blame for China’s first quarterly trade deficit since 2004. Chang reports:

For the January-March period, imports were up 32.6%, posting a quarterly record of $400.7 billion.  Surging commodity prices accounted for much of the increase.  Customs data shows that China imported 14.4% more iron ore in the quarter but paid 59.5% more for each ton.  That meant the cost of the imported ore was up 82.5%.  Soy bean import volume decreased by 0.7%, but China paid 25.7% more per ton.

In the quarter, oil imports went up by about 12% by volume and 39% by value.  China was helped by the Japanese earthquake-tsunami, which initially resulted in lower prices for crude.  Yet Japanese buyers are bound to contribute to rising energy costs this year as they begin to rebuild as well as restart production lines.  And look for copper to also drive up China’s import bill soon.

So China is now importing inflation.  At first glance, price increases look manageable.  The National Bureau of Statistics announced that the consumer price index increased 3.3% last year.  In February, inflation was 4.9%.  Sometime toward the end of this week, NBS will tell us inflation crossed the 5% mark last month.  Analysts are thinking 5.2%.

But in reality inflation is closer to 10%.  Beijing technocrats are getting desperate, and they showed their hand in January when they lowered the weighting of food in the CPI.  If they had not done that, inflation for February would have been, say, 0.2% higher than the officially reported 4.9%.  Food inflation in China is somewhere near 20% at the moment.

–If you were commanding an economy of 1.3 billion, you wouldn’t want to pay record prices for soybeans and other food imports. Not only is food inflation politically destabilising, but frankly, you have to wonder if we’ve reached a point where the rest of the world is going to find it hard to supply the raw materials China needs to keep growing at 9%.

–The alternative is that China won’t or can’t grow that fast, no matter how much the political leadership needs pedal-to-the-metal growth to keep unemployment under control. That inevitably means the rosy scenario for Australia will end sooner or later. Australian firms love it when export values soar thanks to rising underlying commodity prices even if export volumes don’t. But if volumes and values both go down, so do earnings. And so do stock prices.

–We’ll get to some reader mail in just a moment. But first a rather unpleasant warning. It has come to our attention that some stock brokers and financial planners are distributing entire issues of our newsletters and trading alerts to their clients. This is illegal. If you’ve been doing that, please stop now.

–A few readers have written in saying they received the entire issue from their broker on the same day it was published to paid-up subscribers. While we appreciate the desire to share valuable information, we do not appreciate distributing copyrighted material to large lists of non-paid subscribers. Not only is it illegal, but it has a negative effect on subscribers when share prices are pushed up by investors who read about the recommendation through their broker.

–If your broker has forwarded you copyrighted material published by Port Phillip Publishing, please let us know by sending an email to dan@dailyreckoning.com.au. Those emails will come directly to our inbox. Your privacy and confidentiality will be fully respected. All we’re trying to do is find out who’s been doing it…so we can request they stop and follow up with legal action if necessary.

–It sounds threatening and draconian. But we take our copyright seriously because it affects the usefulness of the advice our readers pay for. Even if your intentions are right, to share important stories, it is NOT right to distribute our material to your own clients. If you’re doing that, please stop now and be on notice that we’re compiling names of offenders and will take action if necessary.

–Now, on to a few reader e-mails…

Dear Sir/ Madam,

I understand that gold in 1980 was US $ 1,800 per oz this is the highest price recorded to date..I stand to be corrected, but your US $ 1,471 per oz is incorrect.

Yours sincerely,

Michael Thomas

–Hmm. Consider yourself corrected Mr. Thomas. The nominal high for gold in 1980 was US$850. In today’s US dollars, that’s more like $2,417. This is one reason why Dr. Marc Faber thinks gold may be cheap today, even after making nominal new highs.

–What about the Aussie gold price? You can see from the chart below that Aussie gold made its all-time high in February of 2009 at $1,535.68. Since then, the strong Aussie dollar has effectively capped the Aussie gold price from making new highs. Still, the price has been rock solid. And obviously, a China-related drop in the Aussie currency would will probably lead to a rise in the Aussie gold price. That makes buying on weakness a good strategy.

–Here’s a note in reply to our essay on H.C. “Nugget” Coombs, Australia’s first central banker.

Dan

What a great shame that you had to sully an otherwise excellent article on Nugget Coombs with your right-wing idealism!  Please note most people in Australia have had a surfeit lately of right-wing/left-wing ideals and are sated with politics.  To say that, “we find Coombs’s intellectual point of departure…deeply repellent” is itself repellent for an Australian to read.

Please stop trying to Americanise Australia.  We don’t want it.  Can’t you see that it’s right-wing people like yourself that have been the ruin of America?

Belief in liberty vs. government regulation has been the direct cause of Wall Street’s destruction of America’s economy, caused largely by the repeal of the Glass Stiegel [sic] Act.  Your expressed desire for liberty connotes the licence of the ruthlessly greedy to exploit the country while the govt stands by and watches America self-destruct.

Please let’s spare Australia from such a fate!

Janice Lemon

Cheltenham, NSW

–That’s a bit harsh to blame us for ruining America, Janice. We haven’t even lived there since 2002. But you’ve made a rather large error when you say, “Your expressed desire for liberty connotes the licence of the ruthlessly greedy to exploit the country while the government stand by and watches America self destruct.”

–The only way you could have possibly concluded that from reading our essay is if you believed it already and were just looking for a chance to scold someone. And you’ve proven our point anyway. You share with Coombs an inherent suspicion of liberty.

–Why do you hate freedom so much?

–It sounds like you think that when people use the word “liberty” they are really using a code word for greed and exploitation. That’s not what we mean by it at all. What “caused” Wall Street’s destruction of America is not “capitalism” or “liberty” but a kind of corporatism where Washington and Wall Street colluded to destroy sound money and put the nation in enormous debt and profit by asset inflation.

–The hero of real capitalism is the entrepreneur, not the money shuffler. He delivers the goods and services that people want at a price they can afford. If you think that’s “right wing radicalism,” there’s 300 years of Western prosperity to contradict you. That prosperity is based on free enterprise, the rule of law, low taxes, and free trade. But argue with history if you’d like.

–You might think—and we’re totally guessing here—that Coombs was trying to protect “the people” from the destructive forces of “the market”. But our point is that his view is based on unsound money and inherent distrust of liberty and what people will do with it. To be fair, he may have thought Australia was too vulnerable or young to thrive without strong centralised institutions.

–But for whatever reason, historical or personal, Coombs seems to have been that particular type of Australian who believes that authority belongs in the hands of a technocratic elite. That usually turns into a system where the people running the bureaucracy and the government place their judgement over your liberty.

–That’s deeply repellent to anyone who values liberty. It’s also dangerous to cede authority to anyone because you believe they have your best interests at heart. But it’s a free country for now, so you don’t have to respect liberty  if you don’t want to.

Dan Denning
For Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. The shot taken at Janice Lemon’s letter is a cheap one; it’s puzzling why you would want to insult one of your readers. Quite clearly she is not blaming YOU for ruining America; “it’s right-wing people LIKE YOURSELF that have been the ruin of America”, she asserts. Only a propaganda merchant deliberately misreads the view of an opponent.

    The presentation of the issue as one involving “liberty vs. government regulation” is also spurious, though for different reasons. There is the liberty of the marketplace and there is the liberty of the socio-political arena. They are not identical, but in both cases only the liberal state can underwrite and guarantee individual rights. Freedom in the socio-political arena is achieved through the use of the powers of the liberal-democratic state, which are used to prohibit the use of violence and coercion by armed groups. The lack of liberty in many African polities is caused by the absence of a strong rule-bound state. Note too that the weakness of the state in these nations also precludes liberty of the economy. Weaken the liberal-democratic state and you get: Mexico.

    This is why the anti-tax craze of ideologists like PPP is irrational; starve the state of funds and it ceases to function. Or, allow one class, the plutocrats, to take total control of the government and – some way down the track – you tempt the rise of groups who have nothing to lose but their …. etc. But before that point you have misery on a very wide scale, disinformation of an Orwellian kind and the deployment of a repressive apparatus like the one employed by the Chinese Communist Party. Is that what you want?

    Philip Proust
    April 12, 2011
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  2. I need to agree with the above poster, that was an exceedingly poor shot. At least if you’re going to argue against someone’s point, quote in full. A cowardly and unbecoming argument that was.

    Kane Murdoch
    April 12, 2011
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  3. I too can’t stomach libertarian vitriol. A shepherd needs to get down among the weeds with the flock but the elitist crap and the crash through or crash approach presents us with little better than a Robespierre styled movement in most libertarian quarters.

    Australians can celebrate Nugget Coombs for being a man of good character, we can even celebrate the fact that Evatt was lionhearted and true to himself even while being a psychotic despot.

    Character and humanity count.

    Now let’s go back to mining, property law and the common wealth and work out if paper owning lease holders are rent seekers in the I came I saw and I conquered variety like conquistadores or based upon knocking a few stakes in the ground they have an evergreen right to libertarian property lore.

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  4. And there speaks a bloke who has experienced a real recession while not being especially wealthy or being in a nice secure government job perhaps?!?

    Top comment Ross!

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  5. “everything is quickly becoming a proxy war between the Iranians and the Saudis”

    Oh really? And who are the Saudis?

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  6. Pardon my naivety perhaps, but aren’t they Uncle Sam’s best mates in the Middle East?

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  7. Apart from Israel presumably … ???

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  8. People like Janice Lemon continually confuse corporatism and statism for free markets.

    The whole point of individual freedoms and smaller government is so that large corporate interests cannot collude with large governments to rob you of your wealth.

    Corporate monopolies and oligopolies struggle to form without large governments there to assist with the control over the market. History is bursting with examples, from aviation to banking. It’s only when the size and reach of the government increases can you end up with sub-prime mortgage bubbles, currency devaluation and all the other malaise that causes modern economies to teeter and fall.

    The true value of liberty is being able to forge your own way through life. The true aim of governments is always to increase their reach and budget. The way they do this is by promising to even out the risks to your life and livelihood. But whenever risks are traded away, there’s always a cost, and that cost is usually your freedom to choose.

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  9. Uh-Oh, Dan,

    Reading the (socialist-thinker) posts about your ‘cheap shot’ taken at Ms. (socialist-thinker) Lemon suggests that you (ya “f…arrogant foreigner, who the f…d’ya think ya arrr?”) may well be in imminent danger of receiving one of the masterpieces of Australian eloquence: “Eff ya don’ lyke it heah, wy don’cha f..orfe ta wheah ya come from?”

    I’ve been on the receiving end of that one many times. In a society now constructed on a foundation of delusion and lies, the truth is a virtually automatic jump-start for that knee-jerk response.

    “Jerk” being the operative.

    From a society no less that has now proved itself completely incapable of raising human beings of the quality and standards required to perpetuate its original, excellent culture (and forget perpetuating civilisation) and maintain the nation’s previously-established exellent infrastructure, both of which the aforementioned eloquents are – with attitudes and education well exemplified by their favourite question invoked in times of intellectual crisis (i.e. at least often, if not all the time) – destroying it all.

    These are the very same people who will ‘proudly’ ( as in…”before the fall”) wave Aus. flags on April 25th – Anzac Day, I must mention for the enlightenment of some 99% of the population – in commemeration of those who suffered terribly and died for the ‘Australia’ that said eloquents are now casually throwing away in their socialist-style ignorance.

    Dunno about anybody else, but even just posting these thoughts produces some nausea – NOT for the Anzac day tradition or any other “True Australian” traditions which I personally revere – but at today’s mindless ignorance and arrogance to be seen and heard everywhere.

    Methinks there’s a certain ‘Lucky Country’ whose luck is rapidly running out.

    Indeed, it may have already left specifically because it “don’t no more luyke it heah.”

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  10. @brc. I agree with your take except in the case of social capital as I stated plainly and narrowly alluded to; and elsewise in the capitalising and seed investments in base infrastructure (I wouldn’t include most upgrades or projects like the NBN but I would include standardisation of rail lines and the Melbourne-Brisbane inland route freight rail line. Property right annexation and legalised anti competitiveness by the US rail barons drove the seed investment and growth in the US rail system and such a pervasive cleptocracy still is the operative condition in the US today. Given our limited population and industry density potential I believe our forebears made a better fist of it than a US styled alternate would have achieved.

    I would draw attention to the relatively high levels of Australian public infrastructure delivered in the first decades after Federation by the “corporatists” that served us well until such levels of investment were curtailed in the 60’s when many were complaining of the tax burden imposed by that earlier generation’s spending. The benevolent hand of the government and the leadership of the mutuals to concentrate investment into infrastructure that might otherwise have been diluted in a free market economy and from which smaller scale enterprises were to rise later. Inland rail and storage and the wheat belt is a classic example. On this score we might at that time have been assessed as having performed better than our foreign peers even if such measures are fraught.

    Kennett was also biased toward the corporatist infrastructure investment path in Victoria and his legacy is in the ascendancy compared to the poor levels of infrastructure delivered by Wran-Greiner’s NSW Inc mentality.

    Another thread to appear here shortly is the libertarian idea that wholly free markets (free of the illusory “protections” afforded by government regulators and mandated rules) are better than regulated markets. That may be so only if the instruments of accessing privileged information are also as freely available across that market. There would however be an elite and “free” group that would be working hard to deny the market that informationn.

    I have said here before that Ayn Rand scenarios de-risks predatory behaviours which in the systemic balance akin to that in nature must retain moral hazard. I am may be inclined toward Barry Goldwater but I steadfastly believe that Volcker-Reagonomics is the US cleptocracy personnified and rather than a trickle down economy the US is a trickle up economy with Friedman and Rand narrative used to feed the chooks as much as Keynes-Bernanke narrative that serves the same ends.

    Peter Forde runs only an inconsequential tribal strawman above, but do come back when you have something of substance to say….

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  11. I thought Saddham was America’s best friend in the middle east ?
    Oh, damn, I’m so last century.

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