The McAlvany Weekly Commentary
With David McAlvany and Kevin Orrick
Kevin: David, a few days ago we recorded an interview with Dr. George Friedman. Before we go to that interview, we should probably mention that there have been a number of things that have occurred in the Middle East that we will cover at the end of the program. You had mentioned earlier today that in the last few days news events have gone from zero to 60 without us even anticipating what was going to happen.
David: It is interesting, Kevin, because we are talking about geopolitical issues, which have a purely economic backdrop to them, so very quickly, with an environment that was perfectly set for instability, you have both political and geopolitical issues throughout North Africa and the Middle East. As you said, we will address that as soon as we finish the interview with George Friedman.
Kevin: Our guest today is a return guest. He is someone who always gets us thinking. He is a man who understands strategy and positions, and like pieces on a chessboard, there are positions of power and positions of weakness, I am talking about George Friedman. The Next 100 Years is his book from two years ago.
David: That is right, two years ago George Friedman crafted a piece that explored the possibilities far on the horizon, a look at the shifting sands of geostrategic relations and foreign policy over the next 100 years. As the decades pass, and as we enter into the 22nd century, at what place will today’s developed and developing powers arrive, after setting their trajectory right here, right now?
Kevin: That was the question he was asking in that book. What will it look like in 100 years? Will the United States even exist? Or Mexico? Or what have you?
David: And for Friedman, America remains the dominant player. However, he does suggest, and follows up in his subsequent book, that there are immediate challenges that have to be met.
Kevin: His subsequent book, that we have just recently read, and we were fortunate enough that he sent us an advanced copy, is The Next Decade. I thought it was an excellent read, didn’t you?
David: It was released for the general public on January 26th. You can now get a copy of that, and we would encourage you to. In recent days, Mr. Friedman has launched what really is another ambitious exploration, but on a scale that I think many of us can better grasp – the next ten years, rather than the next 100. It is a span which he describes as directly connected to current policies, and current leadership. He emphasizes that the United States will have to crystallize its identity under strong leadership. The leadership suggested as necessary has been demonstrated by the likes of Lincoln, FDR, and even Reagan.
What is interesting is, looking at that – Lincoln, FDR, Reagan – there is not really a partisan bent to what he is talking about. He is not talking about Democrats or Republicans. He is not talking liberals or conservatives. He is talking about a personality type, isn’t he? He is talking about somebody who is maybe willing to bend the rules in an uncomfortable way, to get what may be a higher purpose accomplished.
David: That is right, Kevin. He does say that his grave concern, and he alludes to this throughout the book, is that there is a conflict between what it will take, on a pragmatic level, to maintain the power and dominance that the U.S. has on the world scene today, as an empire, while at the same time preserving a republic with the priorities of constitutional governance, and accountability to the people. It appears that one may have to be sacrificed – the constitutional republic – for continued world domination.
Kevin: And that is what I was talking about as being very, very uncomfortable. When you read his book, it is very pragmatic, to use that term. It is very practical. And you say, “Oh my gosh, what good is America as an empire, if that is really what we are, if we have lost what made us good? If we have lots what has made us free?” I know that is not his desired outcome, but he is saying, “You had better ponder this, while we are in this position.”
David: I think that is fair to say, Kevin. It is not a desired outcome, just one that an analyst, specifically, George Friedman, is trying to come to terms with, as a highly probable outcome. It is not the only challenging idea to wrestle with, either, in the book – not the first issue that is raised by Friedman that is uncomfortable for us to entertain. But as a reminder to our listeners, I would suggest that an idea that you have not wrestled with, which carries with it a degree of struggle, is an idea you have not really begun to entertain. Feeling uncomfortable is not something that should put us off, and in this book, and in our conversation today, George will take us directly into the fray.
Kevin: David, you have been telling the guys here at the office that they really need to go back to Machiavelli’s The Prince. It is a work that some people see as Satan’s own words on holding power. Other people say, yes, but it is very much realistic – something written to the Medici family in Italy 400-500 years ago, regarding how to maintain and manage power.
David: As a background read, we find an unusual connection made between the American titans of political leadership – Lincoln, FDR, and Reagan – and a voice from the past. You have Friedman, who revisits Renaissance Italy and listens to the whispers of none other than Niccolo Macchiavelli. As you suggest, Kevin, for some Machievelli is the devil, and for others, he is a respected master, admittedly, of a dark art, that of statecraft – a trade that does not require you to roll up your sleeves to get dirty.
You have, in that period of time, the Renaissance, political philosophy, along with most other ideas, being re-examined. Many of them were being put through the grid of ancient Greek and Roman ideas, because you had these massive excavations which were occurring, and they literally dug up the classic statues and architecture of antiquity. The Italians subsequently gave new birth to the old and cherished forms of what was a bygone era. That was the era that Machiavelli lived and wrote in.
Kevin: That was the era that was the first true study of past empire. This was the birth of the Renaissance. This was when libraries were opened and people were reading the classics, and starting to figure out, “Wait a second. What did the Greeks do that the Romans didn’t?” Or, “What did the Romans do that Charlemagne didn’t?” This was a period of time where people were condensing thoughts, for the first time, on political philosophy.
David: Very popular, was the idea, in the Latin words, ad fontes, or back to the fountainhead. The concept, at the time, during the Renaissance, was that you had the purest thoughts the closer you got to the source of this water, if you will. If you go back to the headwaters, you do not have anything that is dirty or corrupted.
The idea of the classics was to go back to ancient Greece and Rome and explore that. Machiavelli, in his book, Discourses on Livy, expressed a keen fascination and respect for the classics. His core belief, in fact, was in a strong and unified Italy, and frankly, a constitutional republic. The one that he saw in Rome, was his ideal. The problem was that Italy, in the 15th century, was nothing like it. You had the plundering Lombards, you had the excessive taxation and corruption coming from Naples and Tuscany, and it made Italy into a patchwork of very unorganized, and very self-interested, mini-states.
Kevin: It almost sounds like the mafia today, or Little Italy in New York.
David: (laughter). What Machiavelli ends up doing in The Prince, is completely setting aside his admiration of a free republic, for what he considers as the only means of achieving a united Italy, and the prince is that character that he believes can achieve this. He is both a monarch, and unfortunately, a despot. Machiavelli, however, does not write it that way. That is our conclusion.
There is a moral cynicism in The Prince, Machiavelli’s subsequent book, as the ends of unity of these little city-states, and of his concept of empire, justify the means of duplicity and amoral leadership. Critical to success is the prince’s ability to convey a deep moral orientation for the state, while at the same time obscuring the less than moral means of achieving the stated objective.
Kevin: What he is saying is that it is okay to lie to achieve a good end, if you are a statesman.
David: And with unique insight and clarity, George Friedman brings Lincoln, FDR, and Reagan as the cast of characters that have filled these shoes in recent times. He goes further, to assume that the possibility of maintaining the American Empire, even if it was accidentally achieved, will require a similar type of character, one that pursues the good of the empire, which, similar to Machiavelli, is the security and welfare of the state, while employing any means necessary.
Kevin: Another place that made me uncomfortable in this book, because hopefully we are looking at things in a moral, ethical, way, both with Machiavelli’s, The Prince, and in George Friedman’s analysis, both in The Next Decade, and frankly, even in his book from a couple of years ago, The Next 100 Years, he is looking very coldly, strategically, as to what the best move is.
One of the things that he brings out in the book is that we have a blindness. There is a blindness in America. Maybe it is a youthful, idealistic blindness, about how much strength we really exert worldwide, and in that blindness, we can create a tremendous amount of damage – unintended maybe, but still, a tremendous amount of damage – by not admitting the strength that we have, and not administering it in a way that is more strategic, more planned.
You were just recently talking about Milton’s poem about Samson, and his incredible strength, but he was operating in blindness.
David: Samson Agonistes. This is the character, Samson, speaking: “To me, strength is my bane, and proves the source of all my miseries, so many and so huge that each, apart, would ask a life to wail, but chief of all, oh loss of sight, of thee I most complain. Blind among enemies – oh worse than chains, dungeon, or beggary, or decrepit age.”
If you think of the American Empire as a great Samson, as a colossus, what you have is someone who is blind, certainly, and we will discuss that a little bit today, both in terms of tactical versus strategic thinking, and also, how have we gotten ourselves into this? Strength is, in fact, our bane.
We will come back to this quote in a little while, but it frames several of our discussion points today, because I think it points to whether or not America has the stomach for being an empire. The issue is this, recalling Milton’s quote: Are we blind? Is strength our bane? We have influence that is unparalleled. To quote Harold Laski, a political theorist and economist who died in 1950: “America would soon bestride the world like a colossus. Neither Rome at the height of its power, nor Great Britain, in the period of its economic supremacy, enjoyed an influence so direct, so profound, so pervasive.” And certainly that has grown from 1950 to this day.
George, thank you for joining us. You have described the U.S. as an unintended empire. Maybe you could explain that.
George Friedman: Think of Napoleon or Hitler. They each set out to create empire. They each also failed. But when you think of Rome and Britain, that is not what they set out to do. They set out to make a living in the world, and in the process of doing well, they accumulated more power than they expected. Certainly, they stumbled at the beginning, and then they built the institutions that had to be built in order to manage what they had, for the time they had it.
There are two types of imperialists. The Hitlers and the Napoleons do not do very well, but the Britons and the Romans do. We are at the beginning of where the British were in the early 19th century, late 18th century. That was at a time when they were defeated by insurgents in North American and humiliated. In 1825 it was a time of one of the most colossal financial crises over Latin American bonds that led to a significant depression in Britain. Those are the things they learned from, and they learned to build institutions from it. That is where I think we are.
David: I would say that the constitution of the British during that period may be a little different than the American Constitution today. We, in America, have a culture that is self-consciously anti-imperialist. How do we proceed in great power when the cost to do so is unpopular, and the populace does maintain a vote?
George: One of the important things to understand is that it is what it is. The United States produces one-quarter of the world’s wealth every year. It controls the world’s oceans. It has troops in 27 different countries. I suppose you could withdraw the troops, but I doubt very much that the American public would enjoy a massive diminution of relative economic power. Producing 5% of the world’s wealth is not particularly pleasant. I certainly do not think they want to give up the control of the oceans. Things go both ways there.
One of the really profound issues that the United States faces is the tension between its founding, and the reality which not only was created, but was thrust on it, and the need of the American public to reach a level of maturity that it does not yet have. At the heart of the American dilemma is that we are in a situation where we cannot really back out from the power that we have. There is a great deal of wishful thinking that we can, and still have the benefits we enjoy – we can have our cake and eat it, too – and that really is the crisis, to me, of the next decade. At the heart of it is the question of whether the American public can mature enough to save the republic. I have no doubt that America, as a country, will be the dominant power of the next century, but I am not convinced that the republic will survive in the face of it.
David: That is the crux, to maintain the imperial role that we play, even if by accident. As you describe the Roman, British, and American predicaments as empires, the question is, can we remain a constitutional republic, in that context, over the next 10, 20, 30 years?
George: That is a terrific problem, and it is made all the more difficult that, institutionally, we are not prepared for the role we are playing in the world, and we are not even prepared to be honest about the role we are playing. We have an institutional structure in foreign policy that was born in the Second World War, matured in the Cold War, with 16 intelligence agencies, with a state department that is not always the most effective that you would like to find, with a defense department with its own foreign policy, and a presidency that is overwhelmed in managing these things.
One of the things that happens is that we stumble into unfortunate circumstances, overextending ourselves, and this massive bureaucracy then impinges on individual rights, not because people are willfully seeking power like madmen, it is just that you have this hugely disorganized structure exercising tremendous power, that becomes beyond the power of even the president to control.
We really have to have a transformation in the way this works, but we cannot have a transformation while we lie to ourselves, and say to ourselves, “Once the war in Iraq is over, it is all going to be okay.” We will be engaged in the world for a very long time, and it is not going to stop.
David: There is a middle ground that you describe, between idealism and realism, in our foreign policy. What would that look like in practice?
George: Think about Abraham Lincoln. He was a deep idealist. He hated slavery with his soul, as he showed in the 1850 Great Debates. He ran for president lying about his position on slavery. As head of the United States, he violated the Constitution, for example, arresting the Maryland legislature to keep them from seceding.
David: Suspending habeas corpus.
George: He also aligned with his enemies. He once said, “I hope God is on our side, but I must have Kentucky.” (The slave-holding state.) He did these things, very realistically, in order to preserve his moral standing. This is the real dilemma. There is no morality without power – it is merely sentiment. If you are going to have morality, you have to be prepared to exercise power, and the exercise of power will cause you to do things that seem incompatible with that morality.
Roosevelt had the same problem. Ronald Reagan had the same problem. We Americans like to think in terms of moral sentiment. “This is what I think is right, therefore that is what should be.” Lincoln, Roosevelt, and Reagan all understood they had to be much craftier than that, and honesty, and even the Constitution, sometimes, came after these things. In an odd way, Lincoln and Roosevelt violated the Constitution in order to save it.
David: In your view, there has been, and will continue to be, a significant strengthening of the state, globally, not just in the United States, largely as a response to the financial crisis. In fact, you describe the most significant consequence of the 2008 financial collapse as being geopolitical and political, not economic. Maybe you could explore that a bit.
George: When we take a look at what really happened, we see the European Union, for example, re-examining its basic geopolitical foundations in the face of the crisis. We see the Chinese staggered by the rising American savings rate, much of which comes out of their hide. And in the United States, we see a periodic readjustment of what we mean by the corporation.
The foundation of the free market is the corporation, which says something extraordinary – that it is possible to own all or part of a company, but not be liable for its debts. In a true free market, that would be unthinkable. Ownership and liability would go hand in hand. The way we have created the corporation, it separates the two, and it is a very good thing, because it makes the modern markets possible.
But this is a complete artifice of the state. The state invented the corporation. The state decided what the risks and liabilities should be, and how they should be assigned. And the state periodically adjusts them, depending on the circumstances, sometimes one way, sometimes the other way. And we have been engaged in this for a very long time. Modern economic life is built around the corporation, from the house painter, to the largest company. But this is a political event. These corporations derive from political decisions, are implemented by the state. There is nothing natural about corporate law. It varies significantly.
We have had periodic financial crises. We had the third world debt crisis, we had the savings and loan crisis, and they all have about the same models, which is to say that investors go to an extreme, institutions start to fail, their failure would undermine the nation, the state goes in and bails them out, does a readjustment of the economy, and then the financial community proclaims how stupid the government is for not being better at handling things so they can make money – a very long and very funny process in many ways.
David: Coming back to the issue of leadership. You have contrasted tactical decision-making, made by both the present and former presidents here in the U.S., with that of strategic decision-making, which is both needed and currently absent. What does strategic decision-making look like for the U.S. over the next decade?
George: In the first place – recognizing the permanence of the American presence in the world. I have a lot of admiration for Ron Paul, but when he says, “We have to stop tampering with the world,” he does not also say, “and let’s take the hit in terms of our national wealth.”
The second thing is, how do we handle the world? To me, the balance of power is to international relations, what the Bill of Rights is to domestic politics. It is the foundation of how an empire that is mature handles itself, an example being that Iran and Iraq, Saddam Hussein and the Ayatollahs balanced themselves off very nicely, though very bloodily. They fought a war in the 1980s causing millions of casualties. Maintaining that balance of power made a great deal of sense, from the American point of view. Invading Iraq upset that balance of power, and represented very bad strategy.
This is what balance of power means. The British did not occupy India by sending in an army of two million. It hardly had any soldiers there. It had soldiers and some diplomats, and it basically used the internal tensions of India to govern it, because many of those in India wanted them there, and benefited from it. So it is sort of a Jiu-Jitsu that you are constantly carrying out, and it requires a very sophisticated and careful management of the relationship. Iraq is sort of an example of how not to, and watching the British in India, or the Romans in Egypt, is an example of how to do it.
David: So whether it was the Iraqi-Iranian balance of power, the Indian-Pakistani or the Arab-Israeli balance of power, in the context of the last two, five, ten years, even if you wanted to go back to the 1991 to 2003 period, prior to our engagement in Iraq, we have seen a shifting in the balance of power. Is it possible to regain it, or are we talking about a reconfiguration? Maybe you could start with looking at what that reconfiguration might look like in the Middle East. Of course, there are a number of questions I have for you on Europe, as well.
George: Sure. The first thing is to understand is that the United States has global interests, and no one region can supersede all others. The war on terror has thrown us off balance. Very reasonably, in the first few years we became obsessed with al-Qaeda and the Middle East because we simply did not understand what the threat was. But as we have reached a point of understanding two facts, that the threat is limited, but that it cannot be abolished, as we saw in Moscow recently, we will have terrorist attacks, and protecting against terrorism is one of the things you do, but it cannot be the only thing you do.
The United States right now is all in, in the Middle East. We have no ground forces for anyplace else. Our entire bandwidth is there. In that region there are three balances of power: The Arab-Israeli, the Iran-Iraqi, and the Indo-Pakistani. In Afghanistan, we are weakening the Pakistanis because we want them to fight alongside us, if you will, in Afghanistan, to do what they need to do, and in so doing, we threaten to destabilize the state, and thereby give India inordinate power in the region. We have to ask the question: Is anything in Afghanistan worth destabilizing the Indian subcontinent?
In the Arab-Israeli dispute, the Israelis are now overwhelmingly powerful. They are defining the region as they want to. The United States is listened to relatively little in this relationship. So the question is, how do we create a balance of power that has clearly slipped? It is a country that is fundamentally aligned with the United States, but the relationship has to be tweaked.
But the most important question we have is this: Iran is the largest conventional military force in the Persian Gulf. Nuclear power has nothing to do with it – they are simply the most powerful. We are withdrawing from Iraq. That means that the Iranians will fill the vacuum in Iraq one way or the other, and they will become the dominant power in the Arabian Peninsula, as well. They do not have to invade. The Saudis know how to read the situation and will accommodate themselves. These are areas in which we have to correct the situation.
In the case of Iran, we have two choices: A massive bombing campaign against their conventional forces, which has the virtue, if it works, of solving the problem. It has the vice, if it fails, of really having some angry Iranians coming at us.
The other alternative is to do what Roosevelt did with Stalin and Nixon did with Mao-Tse-Tung – both homicidal maniacs, quite crazed. Deal with the Iranians – cut a deal. Stabilize the situation if we can, and wait for the Turks to become more powerful and take over, because they have to.
In each case, you have a temporary solution. Americans hate temporary solutions. They want a solution to the Arab-Israeli problem, they want a solution to al-Qaeda, and that is not the way the world works. What you have is a series of temporary tweaks, hopefully small ones, that are constantly keeping the system in balance. What the United States, however, is doing right now, is massive over-interventions that destabilize the issues and create larger problems, because we are really not very sophisticated in how we work in the world.
David: While we are fond of permanent solutions, not particularly keen on temporary solutions, it seems, ironically, that we are stuck in these millisecond judgments, and have an inability to plan out a grand strategy, which would include several-step sequences, not unlike a chess game. It seems that is where we are perhaps off-balance ourselves, in terms of engaging these world powers in a strategic way, with a grand strategy in mind. How does the American leadership extend its time horizon and begin thinking in terms of a grand strategy?
George: The first thing to remember is the United States did not become this unintended empire until December 31, 1991, when the Soviet Union collapsed – the last European power that was a global power disappeared. We have been at this for only 20 years, which, from the standpoint of history, is not much at all. What we have to do, in the first instance, is come to terms with the permanence of our situation.
So long as in our mind, we have the World War I mentality – “We are going to go take care of this problem and go home,” or the World War II mentality – “Now the war is over, or the Soviet Union is collapsed, and we do not have to worry about anything,” so long as we constantly believe that we have reached some extraordinary point where international affairs, and war, and danger, are no longer relevant, we cannot have a long-term policy.
Even now, there is a kind of feeling that somehow we are going to defeat Islamic terrorism. We may mitigate it, but we are not going to defeat it. As we reach a political judgment that these things go on for a very long time, that it is our permanent condition, then we can start thinking about the question of how to manage it long-term. So long as we fantasize that we do not need to do that, or that everything will be over very soon, we cannot do that.
I think the fundamental problem is the American public. The American public loves to blame politicians, or bankers – whoever. But the problem is that the American public is psychologically unprepared for the burdens of empire. They are perfectly prepared for the benefits of empire, and they like it, they just do not want to pay the price. They think they can have their cake and eat it, too, as I said before.
The thing we really have to look for, here, is a maturation of the public, and that is a kind of a dialectic relationship between the public and the political leadership. You need to have a leader, particularly the president, who matures the public, the way that FDR matured the public from believing that the war in Europe, for example, was not our war, because he knew full well it would be, and brought them systematically along to understand that.
This is a greater challenge, but one of the ways not to do it, is to believe that the greatest crisis we are facing in our history is 10% unemployment. It is not the greatest crisis. It is an unpleasant thing, but so long as somebody puts on the wall something saying, “It’s the economy, stupid,” he has it exactly right. That’s stupid. The economy will manage itself. It is the enemies outside our borders that are dangerous.
David: Let’s look at Europe, briefly, because as you have said, in the last few years, or decade, we have dedicated all of our bandwidth to the Middle East, and that has created its own imbalances within Europe. You have, on the one hand, a collection of states with a shared currency, but with distinct national interests, and perhaps we will see a return to some level of conflict in Europe, as those strains are played out, both of a financial and political nature. But in the absence of U.S. interests in Europe, dedicated interests, Germany and Russia have developed a bit of a connection, if you will, and this is interesting, because it is part and parcel to the re-emergence of Russia – the connection with Germany, and directly, to Europe. Russia has been, in essence, reborn. Perhaps you would like to address that.
George: The 1990s were fantasy-time, and one of the fantasies was that Russia was finished, that it would never re-emerge. A newer fantasy is that Russia has a declining population, and therefore it cannot be a great power. Russia has always been an economic basket-case, for at least the past 200 years, but its military and political power has far outstripped what other nations could do. And Russia has certainly re-emerged.
In the meantime, Germany is re-examining its relationship to the European Union. The European Union was an institution superbly suited for prosperity. It, unfortunately, was not well designed for crisis. And at the root of it was a contradiction. Developing countries need to run positive balances of trade. They have to take advantage of their low wages in order to build up their economies by exporting. The European Union is built around a Germany which is the world’s second-largest exporter. And in these relationships, the Germans simply overwhelm the development capabilities of these other countries who wind up with negative balance of payments with them.
The United States, in the 1950s, strengthened Germany and Japan by allowing them to protect their markets, while giving them free access to the American market. There were political reasons for that, and it worked, but if the United States had done in the 1950s what Germany does to the rest of Europe now, neither Germany nor Japan would have emerged.
The contradiction built into the EU emerged during the economic crisis. Two things happened. The first thing that happened was that countries like Ireland and Greece realized that their national sovereignty that they had bled for was very much in danger, and the Germans realized they do not really want to pay for the Greeks. They certainly want to flood the Greek market with German goods, but they do not want to live with the consequences.
So the Germans are looking beyond Europe, and they have a relationship with Russia. In the first place, they are dependent on Russia for energy imports – that is absolutely critical to the Germans. Second, the Germans are having a population shortage. They do not want to bring in any more Turkish workers, for obvious reasons, and when you cannot bring in any more workers, you move your factories to where the workers are.
Russia, in spite of its declining population, still has surplus labor, because of the way their economy is structured. German factories are moving into Russia, the Russians badly need technology, so there is a synergy between them, added to the fact that neither of them like the world the United States is running, and would like to form a coalition to block the United States. So you are seeing the emergence of a German-Russian relationship based on mutual interests on all levels, and I think that is going to very much be a key element of the next decade, of course caught between both poles, in the worst place possible.
David: George, thank you for joining us today. We look forward to future conversations. We have enjoyed conversations with your colleagues, Kamran Bokhari, specifically, on Turkey, and we look forward to your analysis from STRATFOR, whenever it is released. We appreciate The Next Decade, and your review of what we can anticipate in terms of international relations and strategy. We appreciate it greatly.
George: I enjoy your show, always. Thank you.
Kevin: David, as always, the time went much quicker than we thought it would. I know we probably did not get through half the questions that you had, but the book, itself, does answer questions. One of the questions that I wanted to hear him elaborate on, but we just did not have time in this show, concerns the fiscal problems that we have right now in this country, and where that leads us with his thinking strategically worldwide.
David: I think, Kevin, one of his assumptions is that, given the degree of power that America has today, there is a permanence to our empire. It is not going to be easily upset, and that power structure is not easily going to be taken away or toppled. I would suggest that there are feet of clay in our particular empire, in the form of fiscal imbalances and fiscal problems. We have Medicare and Social Security, which are promises that, if kept, will force us to devalue our denarius, if you want the historical analogy, or dollar, today, if you prefer. But, how do we proceed without restructuring our liabilities, and without declaring bankruptcy?
Kevin: Could it possibly be this planned devaluation of the dollar, the planned default, actually, through this inflation rate that we talked about with Ian McAvity last week?
David: Kevin, you are right, if there is a concerted effort to devalue, not only our currency, but the yen, the British pound, the euro – yes, you do relieve some of those fiscal imbalances. The problem is, you are creating monetary imbalances in the same stroke, and potentially creating other issues that then have to be addressed.
As we wrap up, an interesting parallel idea: When you look at the naval supremacy that the U.S. has today, and that being in Friedman’s view, one of the significant things that gives us an advantage, something we cannot allow to be lost. We have to maintain that, and maybe even increase that advantage, over time.
But we also have the advantage of being the world’s reserve currency, and there is something that we have begun to talk about in the office – a new geography of fiat, wherein the control that we have is not only military, but is by our currency denomination, as well. We wield a great degree of control around the world, given the amount of trade that we bring to the table, but also by the influence that we have via the underlying denomination – the currency, itself.
Kevin: I think these interviews are valuable in that we look at our picture here in America of the devaluation of the dollar. We see the unemployment rate as high as it is. We see these dark days as possibly not having another side. But in reality, if you look at Rome, as they inflated their currency, and as they went through their incredible financial and economic problems of the several hundred years after Christ, it did take a long, long time, for that empire to ultimately fail.
David: And of note are the number of booms and busts that took place over that 400-year span. We are talking about a normal business cycle that has been a part of every culture, every society, every empire, and it would be an interesting coincidence if it was this particular bust that marked the end of our empire. Friedman argues that it not the case, and it is worthy of consideration. His book is certainly worthy of reading and studying.
David: Kevin, we recorded that program just a few days ago, and it was literally hours before the events occurred in Tunisia and Egypt, issues that are spreading to Syria, Jordan, Sudan, and Yemen. It is interesting how quickly things have deteriorated in the Middle East and in North Africa, and we want to give some comment to that as an important conclusion to the interview with George Friedman.
Kevin: David, it is fascinating to me, as the last three years that we have been doing this program have gone by, we have talked about the financial, moving to the economic, moving to the political, moving to the geopolitical, and one of the things that you have really focused on is inflation, as strange as it may sound, tying that into geopolitics, and how the power of countries is maneuvered. Inflation really does boil down to the cost of a bowl of rice, or a bowl of wheat, and the demonstrators right now in Egypt may not really know what outcome they are looking for, and maybe they are even being motivated from behind the scenes, but really, what is motivating them, not only in Egypt, but in Tunisia, and some of these other countries, is their stomach, and the gas tank.
David: For 29 years Mubarak has been in power, and for 29 years people have griped about someone that they did not particularly like, but someone that they could not necessarily oust, either. He came from the military, he had military ties. That was the source of his power and his connectedness, coming into power. The question is, what have people done during that period of time? Absolutely nothing. What is the flashpoint?
What brings this front and center today is set up by what we just suggested a few minutes ago in the discussion with Friedman. There are fiscal imbalances in the developed world. We have exhausted all of our fiscal solutions, if you will, and have now leaned heavily on the monetary side of the equation. We are, in fact, printing money through Quantitative Easing I and II, and this is being done, not just in the U.S. by the Federal Reserve, but by the central banks around the world.
Kevin: For us, it devalues the dollar. For people in poorer countries, it makes them hungry.
David: This is the issue, Kevin. When we talk about a geography of fiat, we are the world’s reserve currency, and we are exporting that inflation. We are forcing the issue, wherein if we devalue our currency we force other central banks to do the same to maintain a relatively stable comparative value to the U.S. dollar. What does that do? It is a great equalizer in terms of the money, but it not the great equalizer, it is the great problem-creator, in terms of what it does to real things. In this, we are talking about, specifically, wheat. It is an unfortunate confluence of events, in which the U.S. is sorting out its own financial problems, creating and exporting inflation, and at the same time, the average person in Egypt, who is living on two dollars a day, is forced to reckon with the unintended consequences of our inflationary exports.
Kevin: Speaking of unintended consequences, you mentioned wheat, which I believe you had said in the past is Egypt’s major staple, but rice is a major staple in other parts of the world, so what is going on in Egypt with wheat also affected the rice market. Didn’t you say yesterday that the rice market was up-limit?
David: That is right, and this is the main issue, because it is not just that we have inflation. We certainly have monetary inflation, and we have it globally. But then, with that as the context, you have something like floods in Australia, or bad weather patterns in Russia. Just a few months ago the Russians quit exporting wheat, and then on top of that, you have a bad crop in Australia because of the flooding, so you have this inflationary backdrop, and then just a few other pieces of the puzzle have to be put in place for it to become a tinderbox.
In this case, it is the Middle East, but what I would suggest is, while this may have a resolution, whether it is a change in politics, or a significant crackdown from the existing regime in power, what is interesting to me is that the context remains the same – that of an underlying inflation, globally. All it takes, let’s say in Indonesia, or Malaysia, or the Philippines, for social unrest to rise there – instead of wheat, perhaps it is rice, or some other critical commodity. In Latin America, it would be corn, more than any other.
You have an emerging market vulnerability, so while people are beating the drums and suggesting that the future is in the emerging markets, and not in the developed world, what I would suggest is that the vulnerabilities are significant there, and the political upsets, as well. As you said just earlier, we have literally gone from zero to 60 in a matter of days. We spoke, just a few days ago, with one of the preeminent geopolitical analysts in the United States, and this was not on his radar. This was not on anyone’s radar, and overnight we have issues that could very well jeopardize even the standing of the Saudi family.
Kevin: It is an amazing thing, too, talking about flashpoints. Not only did it happen quickly, but when dominos start falling of this stature, your encouragement would be not just to look at Egypt and how they solve this. This is one domino falling, to another, to another, to another. A lot of people do not realize that Egypt is one of the major stabilizing factors to keep Israel from actually being threatened as a nation.
David: That is right, they have been able to take advantage of the significant cushion, which is the Sinai Peninsula, and a peace agreement entered into by Menachem Begin, by the way, under the advice and guidance of one of our former guests, Yehuda Avner, who was one of his chief counselors at the time.
This is really interesting, because it changes the support structure that we have in the Middle East through Israel, because they now have what is, in essence, an existential threat. They have had different threats over the years which have caused them to lose ground strategically, but once again, this is the first time since the early 1970s that they have faced a truly existential threat.
You could argue that Iran and nuclear weapons and things of this nature are outlying events – outliers, if you will – these are your unlikely events, which are real issues, but still, in terms of probability – low probability. The dynamics change radically if Jordan moves to a different position politically. If Egypt moves to a different position, politically, it is a major destabilizer, because what you have in the backdrop, behind Mohamed El Baradei, is the Muslim Brotherhood, which, from 1928, has had one goal in mind.
Though they have executed it through many social programs which are admirable, they have had one singular mission, and that is, re-establishment of the Caliphate, and the implementation of Shari’a law over all previously Muslim-controlled lands. That takes us back to the 8th to the 12th centuries in terms of what they see as an ideal world. This would turn Eygpt into a center of Islamic extremism, and although this is the Sunni version, very different than the Shi’a version in Iran, this is something that has to change the U.S. geopolitical calculus, and it causes us to pause and ask if, in fact, the U.S. state department isn’t revamping all of its strategies.
Why, just in recent days, has Hilary Clinton called 260 foreign ambassadors back to the United States to meet this week in closed door meetings? It is unprecedented. We have never done that before, not in any point in U.S. history, even during World War I and World War II. We have everyone back in one room discussing where we go from here on an international basis.
Kevin: It blows my mind. When I think of geostrategic types of things, I think of carrier groups, and I think of standing armies, or I think of missiles and airplanes. It reminds me of the old story – you lose the kingdom for want of a nail. For the price of rice, or for the price of wheat, we lose the stability that George Friedman has talked about many times, what a critical balance that has to be maintained.
David: It is fascinating, because if you look at the establishment of Mubarak back in the 1970s, and this, for almost 30 years, has been a deeply entrenched power structure, not only in the Middle East, but specifically in Egypt, and in just a matter of days that can be called into question. Whether or not Mubarak is pushed out of power remains to be seen, but the fact that in just a few short days, something as simple as wheat, and an existing prejudice, can upset an entire kingdom – that is impressive.
That is impressive, and I think it goes to prove a point, that the context is critical. The context of a financial crisis, which has led to a tremendous amount of fiscal instability, and monetary abuse, now has set the stage for politicians and geostrategic thinkers to be making either right moves, or wrong moves, which truly jeopardize stability and globalization. Are we in a period of deglobalization, as we have suggested and talked about in times past? It looks as if that is, in fact, the case.
Kevin: Our guest today has been George Friedman. His new book is The Next Decade, and it is just hitting the shelves at this point.
