Saturday, July 9, 2011

World War III: 11 steps towards a Nuclear nightmare

During the cold war, World war III (WWIII for short) was always a hot topic. Analysts as well as regular people discussed how we'd all be blown to pieces or get babies with eight arms and five legs. Nuclear winters would follow, with dust covering the sky blocking out sunlight.

Since the fall of the Soviet union, such talk has gotten much more rare. With the exception of the occasional flareup when North Korea does a nuclear show-off or similar, the issue is pretty dead.

Is it time to bring it back to life?

I am going to discuss a scenario which could lead to a nuclear war breaking out. I am in no way certain that this is going to happen, nor certain of when if it does, I just want to call attention to the issue.

1) The Eurozone breaks down. I know you're probably sick and tired of hearing about this issue, but since no-one seems to take any action in America, I'm going to have to keep talking about it until you do (sometimes I feel like one of those old testament prophets). Bank runs occur all over Europe, and consequently banks make major losses when bonds - normally a risk-free investment - stop paying coupons. Countries which default cannot borrow anymore, so massive cuts in government spending in said countries will follow in order to balance the budget. Increased unemployment follows (yes, that's the short-term effect when you balance the budget), and more people than ever before won't be able to make their mortgage payments. This leads to even greater losses for the banks.

2) Since, as I've so often pointed out, the European and American banks are tied together (American banks have made huge investments in the Eurozone), this means a financial panic that will spread to America in no time. This will be september 2008, but worst, since the federal government will have much more limited opportunities to borrow with a national debt that has skyrocketed since the last financial crisis. Plus, every country in Europe (and many outside) will be trying to borrow money; the interest rate charged will increase dramatically. Also, if the last bailout didn't work, why would this one? Investors will have lost trust in the American government (what little trust they still had). With the

3) China will watch this development carefully. They have about 3 trillion dollars worth in foreign exchange reserves, mainly US dollars. Being rational investors, they don't want to wait until it's too late to get out; if they believe that the dollar is going to drop significantly in value, they will drop their dollar reserve and run for the woods. And when they do; so will other countries as well. The longer you wait with selling your reserve, the less worth it will be (since other countries will be selling before you and the price drops the more dollars there are on the market). Therefore, if for example Japan (with a 1 trillion foreign exchange reserve) thinks that China is about to dump their reserve, they may dump theirs while the dollar still has a decent value.

4) The US and Eurozone hence will be down; the dumped dollar will mean all imported goods suddenly become much more expensive. While the working american may still be able to keep starvation at bay, those on fixed income (unemployed, retirees etc) will not. Riots occur when unemployed mobs break into shopping malls and steal goods they can no longer afford to buy. Martial law is declared in large areas.

5) Many people think that with the US down, China takes over as the world's super power. Nothing could be further from the truth; China needs the US. They produce all the things the US buy. With imports being so expensive and so many americans being unemployed or cutting back, China will fall as well. And China doesn't have any significant quantities of natural resources; all they can offer is cheap toys (and a range of other goods of course). When worldwide consumption falls, China doesn't win. At all. Their economy is actually very fragile, expectations are high and if they disappoint investors, their economy can break down as easily as anyone else's.

6) Meanwhile in Moscow, Vladimir Putin is watching with a smile on his face. Contrary to the Eurozone crisis, China and the US, his country has both a low national debt and more natural resources than they could use in a lifetime (so to speak). Most importantly, they have oil and natural gas. Resources that are vital for a country to function; no matter how bad things get and how much we cut back, at some point we'll always need electricity, fuel and heating. Russia, being a big player in the oil business, will be able to gain political influence by threatening to cut off oil supply if they don't get what they want. In addition to that, with the euro down and unreliable, governments (those who haven't defaulted) who wants to issue debt will have to do so in foreign currency, and possibly even convert current debt issued in euro into foreign currency to avoid yields going through the roof. "Foreign currency" likely means Ruble, given Russia's low levels of national debt and overall stable economy. This means that Russia will get to control the size and interest rate of other countries national debt through its own central bank which sets the interest rate (just like the Fed does in the US), which affects the exchange rate ectectera.

7) The independence of the eastern European countries have long been guaranteed by the United States. Countries like Latvia, Lithuania and Estonia do not have the kind of military necessary to withstand a Russian attack; basically only the US does. Russia has long been looking at these countries with the eyes of a wolf looking on a lamb. The only thing that has kept them from actually attacking any of them has been that the shepherd has stood there, ready to beat the wolf to death with a sheepcrook if it would try anything. With the American shepherd busy with his own problems, the Russian wolf (or is it bear?) is almost certain to take this "once-in-a-lifetime" opportunity. Whether they will actually military occupy the eastern European countries is hard to say; most likely these countries will give up without a fight (except possibly Poland, a country with a history of fighting to the last man) and become Russian vassal states. Like I said above, the US military will be needed at home to uphold martial law in areas no-one ever thought martial law would ever be necessary.

8) The US will be in no position to go to war with Russia. The only affordable war (if there is any such thing) is a war that strikes out the enemy immediately; a nuclear war. Keeping infantry on the ground for what would certainly be a long war against Russia is simply unacceptably costly. Using a couple of nukes - less so. The US would basically have to tell Russia that if they touch the former Soviet republics, they'll get Hiroshima x 10. Russia is unlikely to take the threat seriously; why would the US risk that just to save some states that they don't really have a relation to anyway? But if they do take it seriously, they just might decide that the "first strike advantage" is a very desirable thing. Then, and only then, would the US find itself under attack. The large army of the United States, together with its world-class experience when it comes to warfare and its many thousands of nuclear weapons renders it otherwise untouchable.

9) North Korea has a nuclear arsenal as well that they so far haven't used, mostly because even a crazy dictator like Kim Jong-Il knows that the consequence would be his removal from power, since it is absolutely certain that the US would help South Korea strike back (with or without nukes). Now, circumstances will have changed. Like Russia, North Korea gets a once-in-a-lifetime opportunity to do what they've wanted to do since the end of the Korea war: Occupy the South. Nuclear weapons are likely to be used in such a war to eliminate the enemy quickly. Remember North Korea is far from rich, and wars are always costly, in particular when they are long. A nuclear bomb over Seoul would save time. Japan may well meet the same fate.

10) Eastern Europe is not the only area protected by the United States. Israel gets about 3 billion dollars each year in military aid from the US, and with that aid gone (those 3 billion dollars wouldn't be worth much anyway), it will be significantly weaker. Now, Israel has its own defense and has done quite well on its own (remember the Six Days war, 1967, when Israel alone defeated three arab countries in less than a week). Still, the Arab countries who have been dreaming of driving the jews into the sea every night since 1948 may decide that they will never get a better chance. Thanks to a naive American foreign policy, there will be islamists in charge of Egypt as well as Libya, certainly not making things any better for Israel.

11) The Samson option becomes a real possibility. The Samson option basically means that if Israel's existance is threatened, they will simply nuke whoever is attacking them (remember Samson in the Bible, who ends up killing all his enemies and himself in a murder-suicide). In this case, since we are likely talking about a co-ordinated attack from virtually all middle east countries, it would mean letting nuclear bombs rain over the region, potentially making it uninhabitable for centuries and creating nuclear winters in areas which are among the hottest on earth. Of course, the nuclear winter wouldn't stop there as dust would spread and block out sunlight for areas far away as well (not being an expert in the area, I think it's not unlikely that it would affect Europe). How the Arab countries respond is hard to tell, but at least one of them is likely to have nuclear weapons itself at the time. I am speaking, of course, of Iran. If they have nuclear weapons at the time, their response of course will be to bomb Jerusalem or possibly Tel Aviv. If they succeed (remember, airplanes carrying nukes can be shot down like any other airplanes), it's probably Game over for Israel, being such a small country in terms of geographic area. A war in the middle east will also cut off oil supply or limit it drastically, increasing the dependence on Russia. Many readers may say the solution is to drill in ANWR, and while I understand the way they think, we need to remember that drilling for oil is a slow process; even if we legalised drilling in areas like ANWR tomorrow, it would take years before we actually had any production. In other words, it would likely be too late.

Speaking as a christian, I certainly find this interesting from an eschatological perspective; much of what we can read about in the Book of Revelation is happening today. Since this is not a religious blog, I'll save that analysis for another time, but I definitely recommend you all to read the Book of Revelation and reflect on this yourselves.

This is only a scenario of course, but there is a real possibility that at least some of this happens, and we need to be mentally, spiritually and economically prepared for it.

Questions, comments, thoughts? Please leave a comment.

Thank you for reading,

John Gustavsson


Massachusetts Conservative said...

It's very difficult to see any of this happening, particularly because we will get out of our economic mess starting January 2013, when the 45th president of the United States W. Mitt Romney is inaugurated.

You see, the prescription for solving our economic crisis is rooted in a few big ideas, ones Mitt believes in.

(1) Repeal of Obamacare.

- Uncertainty from Obamacare, especially as it applies to entrepreneurs, is simply unacceptable, and is stopping people from starting businesses.

(2) Tax reform.

- Closing loopholes increases competitiveness. This would increase the incentive to start a business, since entrepreneurs would have less disadvantages compared to big business and special interests.

- Lowering overall rates to compensate for the closing of loopholes would increase America's international competitiveness.

(3) We are on the road to a Balanced Budget Amendment in this country. It will take over a year, maybe 2. But a Balanced Budget Amendment with sane features (look at the one being considered in the Senate, co-sponsored by 47 GOP senators) would be the ultimate way of restoring confidence in America's credit markets.

(4) Natural resource exploitation.

- At a time when developing nations are soaring, developing natural gas, oil, and other forms of energy would create many hundreds of thousands of jobs in this country and also bring our dependence on foreign oil down.

(5) Increasing long-term certainty

- Although much of this is covered above, understanding that the tax code should be made permanent would go a long way toward increasing certainty in business.

(6) And most importantly, a new president in Mitt Romney would be the ultimate confidence-booster for entrepreneurs, signaling an end to American negativity, and a move toward economic freedom.

So basically, I don't see your scenario happening in the next year and a half. Things aren't bad enough for your scenario to unfold. We are likely to get a debt ceiling deal, one that restores a bit of confidence in America's credit-worthiness. It should also be one that includes pro-business features.

John said...

Sorry MassCon, it won't be enough. The eurozone can collapse any minute now, and that will drag you down as well.

Stop thinking of yourselves as being on some kind of deserted island; you need us and we need you. Our financial systems are connected. If ours break down, yours will too.

Massachusetts Conservative said...

Well if ours starts growing again, the Eurozone should see some positive movement.

John said...

Sorry, but you are being held back by the eurozone and them by you.

The problem here isn't simply low growth/demand, it's a functional problem caused by a currency union which should never have existed in the first place.