International Forecaster Weekly

A Hole In Neocon Armor

A hole in Neocon armor... Ideas on where they could go next... measures of deficits and treasury debts... trillions...

Bob Chapman | November 26, 2005

Not only are George and the neocons lame ducks, they face political disintegration. They are political liabilities to members of the Republican Party and this is in the process of causing desertion. The indictment of Lewis Libby is enough to put a large hole in the neocon armor. It is obvious the Plame affair was a Cheney operation and Libby is the designated patsy. We don’t see Libby folding and cooperating, but from a political perspective, he doesn’t have to, the damage has already been done. The key to the downfall of the neocons is a congressional investigation. That would lay bare neocon activities and allow comparison of Special Prosecutor testimony and congressional testimony. That would in all likelihood bury them. The question is, is it possible? Yes, it is but it’s not probable with a Republican Congress. That is for 2006, but a different Congress in 2007 could be quite different and that is when congressional investigations could begin. The neocons are well aware of this and military escalation is a way to defuse the issues. That is why the bipartisan moves over the past week to bring an end to the Iraq occupation are so important. They would stop any further Middle East military expansion. That would mean the neocons would have to create a war elsewhere. That would be difficult but not impossible. The next logical victim would probably be Venezuela.

President Bush’s options grow smaller with each passing day, but some are still available to him. The political world is closing in on George Bush and he knows it. Like anything trapped, he will lash out and so the damage he can do to our country is still immeasurable. Mr. Bush is an extremely dangerous creature. If our troops are not forced to leave Iraq by Congress there will be regime change and or invasion of Syria, which will turn into another insurgency and civil war that likely will spread into Lebanon. Any such actions would bring Iran into the conflict and we’d have a large section of the Middle East in flames. If US troops are committed we’d double the population under occupation. That would entail the commitment of 200,000 more troops, which would mean the neocons would have to impose another draft to fill the ranks.

If George and the neocons are successful in causing war with Syria and Iran, because Congress refuses to withdraw American troops within six months, we could well see China and Russia come in on the side of Iran and we could have a Third World War that would be nuclear. This is why getting our troops out of Iraq in months is now so important. Deluge your elected representatives to stop the occupation. This could be a major turning point for America. If we are not successful it will mean the end of America, as we have known it and perhaps the death of more than half of the world’s population.

On the economic front, personal spending adjusted for inflation is falling as inflation and energy costs cut into spending. At the same time real estate is topping out due to few qualified buyers, large additions in housing inventory for sale and astronomical prices. Consumption hasn’t fallen for three straight months since the recession year of 1990. The 30-year fixed mortgage rate is 6.37%, although unless the 10-year Treasury yields rise this week that could drop back to 6.25%. These numbers are really guidelines. This past week’s rate might have been 6.37%, but in the real world most buyers were paying 6 1/2% to 6/34%. Shorter-term yields are rising and they will force 10-year and 30-year fixed mortgage rates higher making it more difficult with higher payments to purchase homes. The trend has started and it will be relentless.

Manufacturing jobs, due to offshore, outsourcing, free trade and globalization, now only make up 13% of American jobs, whereas service jobs are now at 82%. We produce 9.6% of the world’s goods. At the end of World War II we supplied 53%. Our savings rate is minus 0.4% and we are individually deeply in debt. Our current account deficit is approaching 7% of GDP and in order to finance that we exist financially due to foreigners buying our debt. Household debt is 90% of GDP. Treasury debt is over $8 trillion – which is 82% of GDP. Over the last five years budget debt has increased 33%. Iraq and Afghanistan have cost us over $300 billion, totally wasted dollars never mind the loss of life and those who are maimed for life. Two hurricanes have also cost us over $100 billion already.

We are headed into an enormous financial and economic convulsion as the world attempts to rebalance itself. At the heart of the problem is the US economy. The process has begun and how we know that is that gold is breaking out to new highs in spite of suppression by central banks. The fallout of a US recession/depression will be devastating not only for the US, but for the world and particularly Asia. Once hyperinflation ends the standard of living in the US and throughout the world will fall dramatically.

The Bush neocons have spent nearly as much money on defense as the rest of the world combined. We have a military presence in 192 nations with troops in 135 of those locations.

We also believe, you should note, that the Treasury would have to borrow $171 billion in the first quarter of 2006. That will put the Treasury over the debt limit of $8.184 trillion or very close to it. That means Congress will have to increase the limit. A new limit will be arranged we are sure, but we are also sure there will be great debate and consternation in Congress giving further upward fuel to the prices of gold and silver.

Economic degeneration is just getting underway. That in part is being reflected in the closeness of an inverted yield curve. That is when shorter-term rates go higher than longer-term rates. We are looking at short-term rates at 4.5% by the end of January. By June, we could see rates at 5%, perhaps at a final 5 1/2%. If we are correct this combination of monetary tightening and a highly leveraged and asset-dependent economy raises the spectre of a sharp economic slowdown and a recession beginning before or during 2007. Five percent to 5 1/2% interest rates may seem low and miniscule by historical standards, but the US economy is very sensitive to interest rate changes due to the massive expansion in household sector balance sheets. Easy monetary conditions have made the economy addicted to debt and rising asset prices. What we must also watch carefully is the expansion or reduction in money and credit. It will tell us how long the Fed intends to increase inflation. Now that will have a new Fed chairman coming on that is a monetary expansionist, we believe he will continue where Sir Alan Greenspan left off. That would eventually lead us to hyperinflation.

The US is essentially broke and it is spending almost $550 billion on wars. Treasury debt will grow by $3 trillion from 2007 thru 2010 to over $11.2 trillion.

US imports continue to rise as imports fall. The current account deficit will be over $700 billion this year. Asian nations alone are holding $2.5 trillion of our debt. There is no let up in sight. We envision at least a 40% loss on these dollar holdings once the dollar heads down again. Consumer debts are up 121% to $10.7 trillion. After a 3% increase in interest rates, that is 11 increases, total credit leaped by almost $3 trillion annualized. America is trapped in debt and there is no way out. There is no way back. The expansion of credit is guaranteed, as is ever-higher inflation. The orgy will continue until the financial system is exhausted and then the entire system collapses.