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September 12, 2007
Market Confidence and Iraq

Oil Rises to Record $80.18 on Larger-Than-Expected Supply Drop
Dollar Falls to Record Low Versus the Euro on Rate Differential

There is some hedge fund speculation driving the numbers above, but more important are two fundamental issue hidden behind those.

The minor of these is where things are made. The Gulf states and Russia are buying most of the stuff they import on a Euro base. If the Dollar falls, they are losing buying power. Their obvious solution is to increase their income in Dollars (holding it fairly constant in Euros) by increasing the oil price.

But the major issue here is confidence. This has very much to do with Iraq and the inability of the U.S. to pull itself out of that quagmire.

The financial/commercial world has paid the U.S. for delivering international stability by putting money into Dollar assets. This allowed the U.S. to live beyond its homegrown financial income capacity.

Now the U.S. is no longer able to deliver stability, especially for the big oil exporters in the Middle East.

On the issue of financial stability the U.S. has blown it by allowing its citizens unreasonable speculation without the means to mitigate the consequences.

On the geo-political side the U.S. has proven itself impotent. Sure there are still lots of nukes and planes available, but that is not exactly the kind of leadership the world is yearning for.

The U.S. is spending some $700+ billion per year for ‘defense’. But it would have problems to deliver even one brigade, some 4,000 soldiers, to any contingency should one occur. What can the U.S. do if someone shoots the king of Jordan or the president of Georgia?

With no political ability to end the war on Iraq, as was aptly demonstrated by the bipartisan comedy played in congress this week, there is hardly a chance that the U.S. will regain such capacity within a forseeable timeframe.

Compare the 700+ billion for the military with some $10 billion the U.S. spends for the State Department. The role of the global arbitrator is no longer believable when the only instrument the arbitrator has is total annihilation of this or that country.

Hence no further need to pay for that dubious service.

Posted by b on September 12, 2007 at 19:42 UTC | Permalink
Comments

The insiders called these subprime mortgages neutron (bomb) loans after the Cold War weapon of mass destruction that killed people but left buildings intact. Get-rich-quick schemes spawned the unacceptable face of democratic capitalism.
Western Europeans owned 57 percent of subprime loans.
Leading European bankers are warning privately of the worst crisis in the money markets in 20 years that is yet to come. Huge amounts of commercial paper — market IOUs — come up for refinancing, mainly through London. According to the London Sunday Times, the amounts due this week exceed the $100 billion that came due in mid-August, an offshoot of the subprime debacle. Many of the off-balance-sheet structured investment vehicles that were set up by the banks were “borrowed in the form of asset-backed commercial paper,” explained one bank executive.
“It is both a liquidity and a capital crisis,” said Paul Mortimer-Lee, a global head of market economics at BNP Paribas. “Banks are taking more and more of this paper into their balance sheets, which uses up capital.” This week the Bank of England dropped its resistance to following the U.S. Federal Reserve and the European Central Bank in pumping hundreds of billions of euros and dollars into the system. But it only committed to $10 billion a week for three weeks.

When de Borchgrave speaks of an “unacceptable face of democratic capitalism”, one knows there is some real s**t htting the fan. He is an old journalist with wide and very deep contacts.

Posted by: small coke | Sep 12 2007 21:01 utc | 1

B,
Even Stratfor is saying the surge has failed in its core mission – to wring a deal out of Iran (which I suspect was basing rights on Iraqi territory a la Okinawa or Guantanamo). It’s now a heads I lose, tails you win situation for the US.
My comments to our dealing desk yesterday morning:

Bit of a stalemate, but I think the US position is unsustainable. There simply isn’t the popular backing needed to spend $200bn a year thwarting the ambitions of a democratically elected, majority Shia government allied with Iran.
The stalemate breaks if either the US leaves (and “drawing down” will quickly snowball into a route) or massively attacks Iran. Either way, you want to be long the USD price of oil.

I suspect this is a widely held view in the markets.

Posted by: PeeDee | Sep 12 2007 21:12 utc | 2

I cannot understand why EU bankers took on sub-prime US loans. US is doing a China on the EU.

Posted by: Cloned Poster | Sep 12 2007 21:24 utc | 3

To kill off the social welfare state over there too. The neo-liberals are all in cahoots, doesn’t matter which side of the ocean they come from. Now when inflation hits or benefits are cut, the politicians can claim it is not their fault. The rich will never pay for this. They will be too busy buying up assets for pennies on the dollar.

Posted by: Malooga | Sep 12 2007 21:33 utc | 4

Interesting World Bank graph from DeLong illustrating the magnitude of capital flows into the US over the past several years and the forecast for these to turn to outflows in 2008.
This would imply a higher savings rate (and lower consumption) within the US, and a shift away from US dollars by other high income countries (HIC) which I believe means Russia and the Middle East.
Interesting World Bank presentation on global prospects from around May 2007.

Posted by: PeeDee | Sep 12 2007 21:55 utc | 5

2
Maybe Statfor’s observation is the answer to my question in another thread: why all this anti-Iran and anti-Syrian activity exactly at the time that Petraus is in Washington?
Perhaps it is the last dance to try to wring concessions out of Iran. Because, contrary to most readings of Petraus testimony, the sum of it, seems to me, to be that he is throwing in the Surge towel because 1) he has to. US will be out of ground forces and materiel, and 2) it isn’t accomplishing enough of anything to go longer. That is, Petraus testimony seems like an approximation of declaring military success (of some indeterminate sort) and leaving.
One of Petraus’ charts seems to recommend a continued drawdown, beyond the escalated numbers from this past spring. And why not? It was already determined that there is no effective, active military position in Iraq at lower troop levels.
Not sure, PeeDee, if it is correct that withdrawal would necessarily turn into a rout. Seems it might be in Iran’s and other neighborhood interests (xcpt Israel) to allow any withdrawal to proceed with a minimum of interference. US could still launch a load of mayhem and destruction on Iran or others, with air power and a few other assets, if they were seen as contributing to a bloody rout. Iran has been patient so far; that patience should hold as US retreats.
Question would be whether outside players in ME regions can and will hold back the various internal factions that they support inside Iraq, who will be eager to get the first leg up in the ensuing power struggle. And whether Congress and administrative opponents can hold back the contingent in the US that still hopes to land some devastating military materiel on Iran.

Posted by: small coke | Sep 12 2007 22:16 utc | 6

Damn…while the surge may have failed…
Market Confidence of and in Iraq has birthed a new model…

The Bush administration has taken several important and little-examined measures to institutionalise the privatised warfare model forged in Iraq, making it a permanent fixture of foreign policy. In July 2006, Bowen, the inspector general for Iraq reconstruction, issued a report on “lessons learned” from the various contractor debacles. It concluded that the problems stemmed from insufficient planning and called for the creation of “a deployable reserve corps of contracting personnel who are trained to execute rapid relief and reconstruction contracting during contingency operations” and to “pre-qualify a diverse pool of contractors with expertise in specialised reconstruction areas” – in other words, a standing contractor army. In his 2007 State of the Union address, Bush championed the idea, announcing the creation of a brand-new civilian reserve corps. “Such a corps would function much like our military reserve. It would ease the burden on the armed forces by allowing us to hire civilians with critical skills to serve on missions abroad when America needs them,” he said. “It would give people across America who do not wear the uniform a chance to serve in the defining struggle of our time.”
A year and half into the Iraq occupation, the US State Department launched a new branch: the Office of Reconstruction and Stabilization. On any given day, it is paying private contractors to draw up detailed plans to reconstruct 25 different countries that may, for one reason or another, find themselves the target of US-sponsored destruction, from Venezuela to Iran. Corporations and consultants are lined up on “pre-signed contracts” so that they are ready to leap into action as soon as disaster strikes. For the Bush administration, it was a natural evolution: after claiming it had a right to cause unlimited pre-emptive destruction, it then pioneered pre-emptive reconstruction – rebuilding places that have not yet been destroyed.
So in the end, the war in Iraq did create a model economy – it was just not the “tiger on the Tigris” that the neo-cons had advertised. Instead, it was a model for privatised war and reconstruction – a model that quickly became export-ready. Until Iraq, the frontiers of the Chicago crusade had been bound by geography: Russia, Argentina, South Korea. Now a new frontier can open up wherever the next disaster strikes.

Why failure is the new face of success
As above, so below, as abroad so at home… Jesus, this explains so much.
I have been saying for years this is the beginning foundations of a paradigm war, an ideological war. Five years on and we’re nearer to obtaining a common understanding of the term and of what is happening. Problem is, while our collective understanding is finally coming into focus of that foundation, while we have been grappling with seeing it, they have gone on ahead a built the house.

Posted by: Uncle $cam | Sep 12 2007 23:37 utc | 7

Don’t have enough to think about? Read “The Return of the Doomsday Machine” by Ron Rosenbaum at Slate on Aug. 31.Makes several things come a little more in focus and is more than a little scary.

Posted by: R.L. | Sep 13 2007 4:02 utc | 8

they have gone on ahead and built destroyed the house.

Posted by: Bea | Sep 13 2007 4:07 utc | 9

!!??SCHADENFREUDE??!!
Fox News
Political and military officers, as well as weapons of mass destruction specialists at the State Department, are now advising Secretary of State Condoleezza Rice that the diplomatic approach favored by Burns has failed and the administration must actively prepare for military intervention of some kind. Among those advising Rice along these lines are John Rood, the assistant secretary for the Bureau of International Security and Nonproliferation; and a number of Mideast experts, including Ambassador James Jeffrey, deputy White House national security adviser under Stephen Hadley and formerly the principal deputy assistant secretary for Near Eastern affairs.
Consequently, according to a well-placed Bush administration source, “everyone in town” is now participating in a broad discussion about the costs and benefits of military action against Iran, with the likely timeframe for any such course of action being over the next eight to 10 months, after the presidential primaries have probably been decided, but well before the November 2008 elections.
The discussions are now focused on two basic options: less invasive scenarios under which the U.S. might blockade Iranian imports of gasoline or exports of oil, actions generally thought to exact too high a cost on the Iranian people but not enough on the regime in Tehran; and full-scale aerial bombardment.
On the latter course, active consideration is being given as to how long it would take to degrade Iranian air defenses before American air superiority could be established and U.S. fighter jets could then begin a systematic attack on Iran’s known nuclear targets.
Most relevant parties have concluded such a comprehensive attack plan would require at least a week of sustained bombing runs, and would at best set the Iranian nuclear program back a number of years � but not destroy it forever. Other considerations include the likelihood of Iranian reprisals against Tel Aviv and other Israeli population centers; and the effects on American troops in Iraq. There, officials have concluded that the Iranians are unlikely to do much more damage than they already have been able to inflict through their supply of explosives and training of insurgents in Iraq.
The Bush administration “has just about had it with Iran,” said one foreign diplomat.
Vice President Cheney and his aides are said to be enjoying a bit of “schadenfreude” at the expense of Burns. A source described Cheney’s office as effectively gloating to Burns and Rice, “We told you so. (The Iranians) are not containable diplomatically.”
—
Schadenfreude? Cheney doesn’t understand the word’s meaning:
http://i1.tinypic.com/4k9k2lx.jpg

Posted by: Dopple Ganger | Sep 13 2007 4:41 utc | 10

we are used to believing that OPEC particularly the Arab producers drive the price of oil but Russia now has a big say too.
and it is not totally inconceivable that at some point in the future, oil/energy may be priced in rubles rather than dollar or euro.

Posted by: jony_b_cool | Sep 13 2007 5:17 utc | 11

Belgium?

This is what is happening in Belgium and you can bet that it will be a preview of what could happen in Europe in years to come.

Posted by: Hamburger | Sep 13 2007 11:42 utc | 12

“The financial/commercial world has paid the U.S. for delivering international stability by putting money into Dollar assets.”
Wow. Do you often get away with bizarrely superficial explanations like this of exceedingly complex relationships?
“But it would have problems to deliver even one brigade, some 4,000 soldiers, to any contingency should one occur.”
This is ridiculous in the extreme. ‘To any contingency’? No. You, like many, seem to be unable to separate issues of top-grade readiness from issues of what the U.S. could respond to if necessary. With 170-some odd thousand personnel in Iraq out of an active duty and reserve armed forces numbering over 2 million, the math isn’t hard to do. If a situation arose in which we _had_ to do something, we have enough capacity to do so. It would not be to anyone’s liking, our capabilities would be degraded, and materiel would be in shorter supply than we’d like, but that’s hardly the same as being unable to respond to “any contingency.”
“What can the U.S. do if someone shoots the king of Jordan or the president of Georgia?”
Say what? What do you believe it could do in either situation before we entered Afghanistan and Iraq?
“Hence no further need to pay for that dubious service.”
We certainly do see that philosophers are neither economists nor military thinkers. (sigh)

Posted by: Michael | Sep 21 2007 9:03 utc | 13

@Michael “The financial/commercial world has paid the U.S. for delivering international stability by putting money into Dollar assets.”
Wow. Do you often get away with bizarrely superficial explanations like this of exceedingly complex relationships?
You may find that superficial. For the bankers in Kuwait, Oman and the UAE the aboce view is quite real and underestimated. I don’t share that perspective (I am not part of that “financial/commercial world”), but it is an existing perspective that has real consequences.
As for US troop availabilty – 2 million US troops says nothing. How many fighting brigades are available on short notice? One? Two? what happens if multiple contingenies come up? Those are questions the bankers in Dubai are asking.

Posted by: b | Sep 21 2007 10:28 utc | 14

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