Clausewitz reversed

The Prussian military theorist Von Clausewitz said that war was the continuation of politics by other means; some have since substituted the word "economics" for "politics".

But such is the complexity of modern industrial society, and the horrific potential of modern military technology, that we may invert the relationship: economic ownership and infrastructure may be the new weapons with which to wage war.

It is not hard to see the power potential in China's increasing stake in the US economy - not only US government bonds, but increasingly, other assets such as equities. Already, the bond market feels the jerk of the chain, and within the last couple of years Britain has stepped in to provide some much-needed slack to America. But the growth of "sovereign wealth funds" could see future governments using their investments to interfere in the equity markets, too. What price free trade then?

And there are other gaps in the armour. For example, America's recent allegations against China of cyber-warfare have highlighted our daily dependence on electronic technology.

Two Chinese colonels, Qiao Liang and Wang Xiangsui, have produced a book examining such possibilities: "Unrestricted Warfare" (1999). Some translated extracts are available here, and the Wikipedia article is here.

This is not to say that China is actually hostile; only that, like the rest of us, she has her own agenda, and her own contingency plans. Much of warfare is not outright battle, but the use of threats and potential threats to gain strategic advantage. Pushing your opponent into desperation can backfire disastrously. As Sun Tzu said, "To a surrounded enemy, you must leave a way of escape."

But we must recover our economic balance, or risk having the imbalance used against us.

Slither

Gold $7.04, the British pound bumping up against $2.03. Is the system settling for a controlled skid?

UPDATE

A day later, gold is up another 1%, (or would that be, the dollar is down 1% against it?), the pound is marginally nearer $2.03, and the Dow is rising.

Michael Panzner agrees with Marc Faber

In Blogging Stocks, September 7:

We're in a rare moment in history where cash is king... My prediction is that the Standard & Poor's 500 could fall at least another 10% from here. I think the economy is weakening and the crisis in the credit markets will worsen from here... this is not the time for a buy-and-hold strategy. But if you must stay in stocks, look at more defensive sectors like food, beverage and healthcare... Gold...

Read the whole item - and see the video - here.

Dow 9,000 prediction revisited

September 8: since August 31, the Dow has slipped further to close at 13,113.38 on Friday; gold has risen to $701 (London PM gold fix). Adjusted for the rise in the price of gold, the Dow is now the equivalent of 12,117.25. So in terms of Robert McHugh's prediction, it has lost 10.98% since July 6. Time for another quiet release of gold by central banks?

How much physical gold does the Fed still hold?

A reassuring image from the Federal Reserve

US bond pressure mounts

...and China has been selling off US Treasury bills, according to Gary Dorsch of Global Money Trends, featured in GoldSeek today:

"Beijing sees a “veto proof” protectionist bill sailing thru the US Congress later this year, and has been a net seller of US T-bonds for three straight months by a record amount of $14.7 billion, the longest period of sales by China since November 2000."

UPDATE

More on this from the Daily Telegraph here.

Selling the family gold?

According to The Mogambo Guru on 30 August, "...gold suddenly plummeted on Thursday, making me laugh nervously, as things have now gotten so bad that central banks are apparently actually increasing their selling of sovereign gold to get the money to pay current bills! Hahaha!"
This would be interesting information for gold bugs. Unfortunately, the World Gold Council has not updated its list of gold holdings since June. Any information, anybody?

UPDATE

Physical gold has enjoyed record purchases in some regions, according to The Market Oracle yesterday.

Scare stories - "the S&P to fall to 700"

Dan Denning, in today's Daily Reckoning Australia, considers whether it may be a good time to unload your investments, and refers to reports of large bets made that the S&P 500 may drop to 700 (currently it's around 1,474) - or possibly rise to 1,700! It's got the conspiracy theorists exercised, although experts say it's a technical matter (see The Street); but the sums involved are large. Stormy weather ahead?

The outlook from Financial Sense

Some voices and topics from Financial Sense, 25 August:

inflation, deflation, gold, cash...

Jim Puplava: ...I've had Bob Prechter on this program and Bob is a deflationist and Bob believes that we get deflation first and then hyperinflation where I guess my views are we get hyperinflation and then what follows will be deflation. And that's the way it has unfolded with great debtor nations. And I think history will repeat itself here with the US. There is too much debt here and it has to be inflated away...

...I really believe that the full force of these storms aren't going to hit until somewhere between 2009 and 2010 when this really comes home to roost. And all of these debt problems, the problems that we have with energy today, availability, peak oil, the geopolitical problems in the Middle East – I do not expect the next decade to be a pleasant one, John. I wish I could say otherwise because as a father with three children, one to get married shortly and looking forward to grandchildren, you know, this is something that you don't like to think about...

credit bubble, credit crunch, commodities, East delinking from West...

Doug Noland: ...the economy is much more vulnerable than many believe because of the credit that was going to the upper end; and I think the upper end mortgage area is where we had the greatest excesses.

So I think when all is said and done, subprime losses are going to be small compared to the losses we see in jumbo and Alt-A, and especially, unfortunately out in California...

...there’s desperation out there to find buyers for mortgages... Washington generally doesn’t understand the risk of Fannie and Freddie [US government-sponsored entities - "GSEs" - that offer mortgages], so of course they would think it’s their role to step in and provide the liquidity.

But... their total exposure is over 4 trillion dollars now. And this is a huge problem, and I fully expect down the road these institutions to be nationalized. And I think the US taxpayer is going to pay a huge bill for this... To be honest, I don’t mind the GSEs if they want to play a role in affordable housing; if they wanted to try to rectify some of the problems at the lower end because of the lack of the availability of credit in subprime. But to think that the GSEs should start doing jumbo mortgages, to try to be the buyer of last resort for California mortgages, my God, it’s hard to believe that makes sense to anyone because that’s just a potential disaster. It’s also reminiscent of the S&L – the Savings and Loan problem that, you know, was a several billion dollar problem during the 80s that they allowed to grow to several hundred billion by the early 90s. And definitely, the tab of the GSEs is growing rapidly right now...

...even if the central banks add a trillion dollars of liquidity to help out this deleveraging we still have this issue of how are we going to generate the trillions of additional credit going forward to keep incomes levitated, to keep corporation earnings levitated, to keep asset prices levitated, to keep the global economy chugging along...

...The global economy may be something of a different story because we have credit bubbles all over the world. Like the Chinese bubble right now is pretty much oblivious to what’s going on in the US and in Europe. You can see a scenario where, you know, you have serious credit breakdown but let’s say Chinese demand keeps energy and resource prices higher than one would expect. So I’m going to be watching this very carefully because we’re going to see some very unusual dynamics as far as liquidity and inflation effects between different asset classes and different types of price levels throughout the economy.

Agriculture on the up

An interesting report this week in the International Herald Tribune about the coming boom in agricultural commodities, powered by demand from emerging economies.

Meanwhile, cattle are moving off the Argentine pampas to make way for crops of soybeans and corn. The cattle are being crossbred to cope with the rougher conditions they'll face.