War Games Stimulus

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In the midst of a global slowdown, which is exactly where we are, the major banks in the world are committed to preventing the world from sliding into a depression. There are nuances of course, about how they are going about it, but the nuts and bolts of it comes down to flooding the markets with what else?

More money.

As my colleague John Frederick Carter noted recently, the central banks will do whatever it takes to reach a 3% inflation level in the major economies.

But will the banks be able to make that happen? They have tried and continue to try…

Stimulus already baked into the cake

More stimulus is on the way via quantitative easing.  Great; everybody sees it coming, the market certainly did and has already reacted.  Much of the effect of the next round of “thin air dollars” has more than likely already been realized and is “baked into the cake,” as they say.

Stimulus bodes well for the market, but not for the economy as a whole because, so far, stimulus has not led to any real and sustained economic growth in the US, Europe, Japan, or China.

Sure, there has been some growth here and there…1.5% or even 2.5%; but those numbers aren’t real growth.  Those are inventory replacement numbers and government contract jobs to green-companies-that-can’t-survive-in-the real-world numbers…

But the bottom line is that the debt party that has fueled global growth for the past 60 years is pretty much over. Having another hair of the debt dog—or hell, another dog altogether—isn’t having the same affect as it used to.

The reality is that there is a level of falsity in our economic model that is becoming unsustainable. The equity markets, as noted above, are mostly inflated from stimulus money, not by demand and profit levels…

So the banks have been successful in inflating at least one part of the economy, but it can’t last forever and the positive effects are less each time.

On the debt side, well, as Bill Gross said without a hint of joy, “the debt markets work until they don’t.” Today, the only answer we have seen for curing debt crises around the world is to write off existing bad debt and then issue…more debt.

And as an added incentive that hasn't worked, we keep interest rates artificially low.

But still, demand flags in the major economies, high unemployment persists, and commodity prices fall as economies choke on debt and false liquidity. Given this reality, what will change the course of the global slowdown?

What will stop the slide of commodity prices and raise demand if stimulus repeatedly fails to do so?

War and the threat of war

One answer may be what we’re seeing in the Middle East right now:  war and the threat of war. Today, war of one stripe or another threatens the entire region.

A quick look tells us that civil war wages in Syria, while violence continues in a post-US Iraq.

But that’s just the tip of the iceberg.  Israel is moving forces south, in the face of a Muslim Brotherhood victory in Egypt; it's no secret that he peace treaty between the two is effectively dead…

Meanwhile, Iran continues to pursue nuclear weapons, with an open threat against (who else?) Israel. A pre-emptive Israeli attack on Iran would surprise almost no one.

Also, the violence in post-Gaddafi Libya continues, as it does in Yemen. But the really big deal is who is on their way to the Middle East and what they’re bringing…

You see, Russia and China are on their way to conduct war games with Iran and Syria.  The scope of their presence is historical, and therefore, provocative…

The Times of Israel reports that:

(T)he four countries are preparing 90,000 troops, 400 aircraft and 1,000 tanks for the massive joint maneuvers, which are to take place along the Syrian coast within a month…and that Russian “atomic submarines and warships, aircraft carriers and mine-clearing destroyers as well as Iranian battleships and submarines will also arrive in Syria” and that Egypt has agreed to let 12 Chinese warships cross the Suez Canal for the exercises.

That’s a lot of military hardware to bring to bear just for a civil war in Syria, is it not?  Does this mean war is on its way?

Not necessarily.  But it does mean that tensions in the area will go up…and it also may also cause a rise in the demand and prices of commodities such as oil.

For Russia, this is very helpful, since in order to stay solvent, Russia needs the price of oil to be at $117 per barrel.  Today, oil is about $85 a barrel.

Higher oil prices would also help Iran, whose economy suffers dearly from US-imposed sanctions.  A hike in oil prices would be a much-needed jolt of revenues to the Iranian economy and keep the mullahs off of A-jad’s tail.

And China?  What’s their gain?  It’s a smart bet that they’ve cut strategic oil supply deals with both Iran and Russia in exchange for their participation.

Of course, the war games give the 4 nations experience in joint operations, and also bring both Russia and China into the Mideast as power brokers…

But care to guess who the games will target? Of course, it’s the US and the dollar-led global financial system.  It’s no secret that Russia, China, and Iran have been in currency talks...

And that many of their interests are similarly aligned against the US-dominated financial system.

But after the war games are over, will the military hardware return home…or will it remain there?  And how will the US react?  Will we pull back in the face of Russian and Chinese military power or challenge it?

Either way, if the war games are intended to create tension and therefore cause the price of oil to rise, they will likely be a success.

The other, more disturbing question is,  “are next month’s war games a precursor to the real thing?

And those are…The Gorrie Details.

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