Wednesday Night #1395 The Report

T H E  R E P O R T

Once again, Charles Cogan dazzled his Wednesday Night audience with a tour de force of political/intelligence commentary, largely focused on United States policy and actions in the Middle East and Afghanistan, but including the changing nature of warfare and discussion of the role of the UN and NATO. [As many will recall, Chuck was the chief of the Near-East South-Asia Division in the Directorate of Operations of the CIA from 1979 to 1984. It was this division that directed the covert action operation against the Soviets in Afghanistan.] Many of the thoughts expressed tonight reflected the essays he has published in his recent book, La République du Dieu , and are iterated in his recent articles in the World Policy Journal.

Geopolitics: Afghanistan, the Middle East, the U.S., UN and NATO
There are wars for economic gain and there are wars in the name of religious beliefs.  If, as has been inferred, there was a religious element in George Bush’s decision to invade, the war in Iraq may possibly contain elements of both, but appears to be slowly winding down as does the Israeli-Palestinian conflict.  Prior to the Six-Day War, the United States had not aided Israel.  That conflict changed U.S. policy to one that not only supported Israel, but marked the end to Israel’s policy of non-violation of international convention, using a semantic interpretation of the translated U.N. text as a pretext for claiming Israeli control of East Jerusalem and the West Bank.  The U.S. used its Security Council veto to ensure non-compliance.
Ever since Condoleezza Rice stated in July 2006 that the world was “witnessing the birth pangs of a new Middle East”, there has been increasing focus on the material – as opposed to spiritual – aspects of what peace between Israel and Palestine would look like. Unfortunately there exists deep hatred between the peoples of the two countries, but if that could be overcome, most probably through a change in circumstance that we cannot imagine now,  it is likely that the citizens could work well together as Palestinians are very talented, educated and with a large middle class. [Update: Events of the last days of December and the beginning of January have put paid to that happy prospect for the foreseeable future]
The war in Afghanistan, in some respects, represents a different example.  The stated purpose of the invasion (war) was to capture Osama bin Laden, destroy al-Qaeda, and remove the Taliban regime which had provided support and safe haven to al-Qaeda, thus  neutralizing the al-Qaeda threat following 9/11.  Al-Qaeda, however, has since left Afghanistan and now operates in Pakistan, which poses a far greater threat  because of Pakistan’s possession of nuclear weapons. After the Taliban was overthrown (quite easily) , and al-Qaeda retreated to the Tora Bora area, in December 2001 Afghan troops – not Americans – conducted the campaign and bin Laden escaped. The question today is why did the U.S. try to nation-build in Afghanistan with al-Qaeda gone? There was no rationale and the same thing happened in Iraq. The Taliban have replaced al-Qaeda as the current threat in Afghanistan and although they appear to be cruel and aggressive by western standards, they are part of the current fabric of Afghanistan and do not meet the original criteria for the NATO invasion. The Taliban (and al-Qaeda) have their own, largely protected rear area across the border in Pakistan. Pakistan itself has its own fundamentalist insurgency and a struggling and inchoate civilian government. The Taliban insurgency in Afghanistan is now inflicting more casualties per month on U.S. forces than is the case in Iraq. And NATO is being undermined from within by the fact that some of its forces in Afghanistan take casualties while others, enjoying “caveats,” which keep them out of the areas of fighting, do not.
The recent Mumbai terrorism is blamed on Lashkar e-Taiba, the military wing of the well-funded Pakistani Islamist organization Markaz-ad-Dawa-wal-Irshad, which was founded in 1989 and recruited volunteers to fight alongside the Taliban.
(Charlie Wilson’s War  – movie and book – was cited as an entertaining but likely accurate account of political adventurism in Afghanistan; this perception is more common among public readers and viewers than among intelligence experts, who are more inclined to regard it as a puff piece.)
When Italy invaded Ethiopia, the League of Nations did nothing; nor did it intervene when Hitler invaded Czechoslovakia.  The purpose of the post war U.N. was to prevent invasions.  We now have wars rather than invasions.  If the U.N. does nothing, the countries of the world have not taken responsibility for the problem.  If there is to be action it should be by the U.N. rather than NATO because that is the role of the U.N.
This brings into focus the role that has been taken on by NATO, and the utility of the United Nations in international disputes.  Osama bin Laden’s ultimate aim is said to be the resurrection of the Caliphate, which ended in 1924,  and by extension, world theocracy.  If this is indeed his aim and if he were to succeed, the United Nations would have failed in its prime objective.  This speaks loudly to the importance of establishing a world government, one probably a supranational body based on the European model rather than the theocratic model allegedly being sought by Bin Laden or the current U.N. structure.  The U.N. remains a useful tool for cooperation in many areas but fails too frequently in its role as international mediator and peacekeeper.
However, the world faces crises today that are the work of non-State movements with little in common with the national interests of a state – or collection of states – subject to rules of international law and governance imposed by the larger community of nations.
Whether warranted or not, Barack Obama represents the hope of change in policy making in the United States, perhaps in the western world.  Will the new President espouse a holistic approach to international problem solving, or will he opt for a building-block approach? Iraq appears to be gradually reaching some form of settlement, but Afghanistan is an immediate problem and Obama will not be able to wait until there is a global solution for every issue. While the Arab-Israel conflict has been going on for some 60 years, it underlies every tension in the Middle East, so if a solution could be found, it would go a long way to lessen the ‘neuralgia’ in the Arab world about the U.S. and the West.Carbon-free aviation
IATA has set a goal of carbon-free aviation by 2050. This will require some highly innovative developments. One announced in July is the partnership betweeb Boeing and Skyhook International to develop the JHL-40, the first neutrally buoyant aircraft, described as a cross between a blimp and a helicopter.
The problem with airship industry is the public perception based on the Hindenburg disaster (which in fact was a fabric fire and not a hydrogen fire), but once that is successfully addressed there is tremendous potential. Helium, an inert gas, is heavier than hydrogen so that it does not give the same lift. Airships are incorrectly considered to be highly susceptible to weather, although this is not the primaryreason that nobody has invested in this alternative technology. Most likely is that the only companies with the money and know-how to do so are the aircraft manufacturers like Boeing and Airbus, who have no interest in competing with themselves.

The economy
David Walker, former Comptroller General of the U.S. has been touring the U.S. on a “Fiscal Wake-up Tour” warning that the current standard of living is unsustainable, and that the fiscal irresponsibility of the government poses a far greater threat than any international event.
As the U.S. government adds daily to the list of financial institutions (Citigroup, Fannie Mae, Freddie Mac …) that are bailed out and in some cases to all intents and purposes nationalized, Ben Bernanke is sending signals that he is prepared to do absolutely anything if it appears to be able to move the situation forward. But where are the bombs going to go off next? And while it is reassuring that the government is showing so much flexibility, it is not clear how effective government action will be. It seems obvious that the government is prepared to create any amount of money which raises concerns about the Quantity Theory of Money  which states that if the amount of money in an economy doubles, price levels also double, causing inflation. In turn, this will mean that sooner or later, interest rates will have to rise, killing the stock market in the process.
There is a distinction between the financial economy, governed by psychology – irrational exuberance and irrational pessimism –  and the real economy, which is best illustrated by what happened in the 1930s – it was not the New Deal that restored prosperity, it was the war. Today, an alternative could be a moral equivalent to war – a mobilizing project -, i.e. heavy infrastructure  investment. Some believe that this is the way Obama is planning to go. Whatever he does do, there  is an opportunity to rethink the entire relationship of government and private sector – a move away from the ownership society. It is noteworthy that his campaign manager, David Plouffe, is continuing to build on the campaign’s formidable use of the Internet as a vehicle for the two way flow of ideas and information between the electorate and the elected,which could mobilize the necessary support for such new approaches.
War destroys excess capacity – you keep blowing up stuff until you no longer have excess stuff – but building infrastructure does not necessarily destroy the excess capacity that exists. India and China and other emerging economies have excess capacity today, but we can hope that they will grow their way into the problems.

The market is an emotional entity. But the markets convey a message based on ‘what was the expected return on capital at the time the investment was made?” Do we still believe that the anticipated returns will be generated? Right now, the markets are saying that a lot of money was invested that cannot generate that anticipated return. This relates particularly to housing. There has been a major misallocation of funds over the past five years and that has to be paid for.
There is a common fallacy that the Stock Market is oversold.  Experts predict a possible temporary upward glitch in the market once the hedge funds have stopped operating and the transient jubilation following the U.S. Presidential inauguration has a temporary positive effect on the market.   However, the Market Technicians predict that aside from these possible events, the problem will persist until the two-hundred-day moving average meets the current price, an event not expected for some time.  The most that can be hoped for is a downward trending, choppy market.  1929-1936, and 1968-1974 were six-year cycles, but the length of the current cycle is really unpredictable and the expectation of a six-year cycle may prove to be wishful thinking.
In one opinion, the best bet for investors is to generate cash, even if it means selling at a loss today. A year from now, there will be bargains, so take some capital losses now, offsetting capital gains from previous years, and the Canadian government will return some money which can be invested in next year’s bargains. One danger is in buying too early.
If you ask yourself: would I buy this stock today – and the answer is ‘no’, you should sell it.