Just based on national balance sheets, 2012 will be somewhere between challenging and catastrophic. But debt and deficits might be the least of our near-term problems if Jim Rickards is right. In his latest King World News interview he predicts yet another war, “sooner rather than later”:
Iran will not be allowed to have a nuclear weapon. They’re going down that path, and this is coming to a head sooner rather than later. They don’t want to give up the program, so all the bargaining is a pretense. They go through the motions of negotiations but it’s all to stall for time.
The Obama administration has woken up to the fact that it’s time to get serious. Things are moving very quickly. Israel has integrated itself into the US and European command and there are joint US/Israel exercises; the pieces have begun to move on the chessboard.
For Israel this is existential. If Iran gets nuclear weapons they’ve said they’ll burn Israel to the ground. So it’s not just a strategic rebalancing, it’s life or death. The US wants to go in first [for a variety of reasons], but there’s residual distrust. How do the Israelis know that the US won’t reach an accommodation with Iran and leave Israel holding the bag? All the information I have is that the US is going to do it. We’ll take out their air force and command/control system, and suppress their missiles.
It is not in the US interest to see China cut off from Iranian oil, so we’ve cut a deal with Saudi Arabia to make up the difference. The Chinese care about the oil, not who’s selling it. Russia is more interested in selling weapons, so they’re approaching it as an arms dealer, selling weapons to replace the ones we destroy. They’re also the biggest oil exporter and win financially if oil goes up.
This will be done with air power, sea power, financial warfare, sabotage, special operations. It’s already going on: Iran’s nuclear scientists are being assassinated, financial sanctions on Iranian banks are being dialed up. The Iranian currency has plunged and inflation is soaring. This is financial warfare; the cyber warfare has been well-advertised.
The Iranians do have a few tricks up their sleeves, including submarines and speedboats. There will be casualties and the US will lose at least one vessel. Still, it’ll go fairly quickly and the US is counting on the Iranian people to rise up against the regime once the war begins.
It’ll take oil to $200 and gold past $2,000. We’ll see a general flight to safety and quality and a lot of volatility in the stock market.
Rickards is analyzing and predicting, not advocating, so don’t blame the messenger. His scenario is consistent with what Israeli leaders have been saying for years and more recently with the movement of US warships to the region. Something big does seem to be coming.
For more details see this excellent report by Chris Martenson.
In one sense this latest war is, if not right, at least understandable. A fight is clearly brewing and the US wants to both protect an ally and keep the oil flowing.* But in another sense it’s absurd. Multiple simultaneous wars are for solvent superpowers with sound currencies and flexible finances, and the US no longer qualifies. Our military is overextended and exhausted and this year Washington will borrow its defense budget from China, add another trillion to the official national debt and maybe three trillion to unfunded liabilities and other off-balance-sheet but very real obligations.
Austrian economics — and common sense — teach that the more leveraged the system the less able it is to withstand external shocks. And war in the Middle East sending oil to $200 would be the mother of all external shocks.
$8-a-gallon gas would be like a gigantic tax increase, shifting the global economy back into reverse and preventing the peripheral Euro-zone countries, Japan and the US from getting their borrowing under control. Who will buy the extra trillion or so dollars of sovereign debt? The world’s central banks, obviously, so the printing presses will run flat-out for the rest of the decade.
The secondary effects are harder to predict but far scarier. The global financial system is hiding trillions of dollars of bad loans and nearly a quadrillion dollars of derivatives, which is another way of saying the developed world’s biggest banks are ready to evaporate. Will the Fed and ECB be able to stop that avalanche when it comes? Who knows? It looks like we’re back at square one in the inflation/deflation argument.
* In response to some well-founded criticism (thanks guys), a reference in this paragraph to “crazies with nuclear weapons” was replaced with something less offensive and hopefully more accurate.