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How is market cycles created There are many factors that go into the process of creating marketcycles. The run-up of the NASDAQ was a prime example.

     June, 2004 - VFSI Economic Newsletter - Page 1 of 8

    14 Woodmere Circle VEON FINANCIAL SERVICES, INC. Middletown, MD 21769 301/371-0540 (F) 301/371-0543 A Registered Investment Advisor Vol. 19, No. 2 June, 2004

    Pac Man Capitalism and War

    By Joan Veon, CFP?


    In the last newsletter I wrote that we are in a period of 3. Capitalism is like “Pac Man.” In order for

    change. For a long time I have been thinking about the capitalism to continue, it needs new markets, various factors that move markets. What follows are new products, and new reasons for people to some of my thoughts which are based on both purchase. Capitalism, if left to its own, will observation and study. become like a locust--devouring everything and

     everybody in its path. Furthermore, capitalism I have spent over 24 years in this industry, beginning in has a major flaw. What is produced has to equal 1980 after the Dow, which is an unmanaged index of 30 in demand what is consumed. If products do not blue-chip U.S. stocks, dropped from 1000 to 750. Today continue to sell which keeps money moving at a the Dow is at 10,413 or down about 8% from its historic certain pace, capitalism can fall and the economy high of 11,300 in 2003. From when I began, this is an can go into depression.

    increase of 1500%! I remember asking a portfolio

    manager how he chose stocks. I was so surprised when For our purposes here, we will only look at “Pac Man

    he said he bought and sold the same stock all the time. Capitalism.”

    It took me a while to understand that he was talking

    Pac Man Capitalism about market cycles, buying high and low.

     In the game of Pac Man, the winning goal is to get the How is market cycles created? There are many factors Pac Man to eat as much of its enemy before it is eaten. that go into the process of creating market cycles. The Perhaps we could call this concept “Playing the Game”

    run-up of the NASDAQ was a prime example. (The or “Survival of the Fittest.” Likewise, the goal of

    NASDAQ is an index that is a measure of the combined capitalism is to get the consumer to continue buying so value of roughly 5000 stocks, traded on the National that capitalism can continue the process of Association of Securities Dealers Exchange.) At the time, manufacturing in order to keep up with demand in order the Fed was pumping in a large amount of money into to make a profit. To do this, the company has to the banking system. Some of that money found its way continually change the product so that it is “fresh” or

    into the NASDAQ which helped inflates the price. “new” and spurs on-going and continuous demand either Furthermore, the market cycle is a result of the Federal by repeat customers or new first time buyers. Reserve actions, interest rates, political instability or

    peace and war. Furthermore, it is not enough to have a steady stream of

     new products, capitalism also needs new markets, and Because the economic, political, legal, trade and reasons for people to buy. Just flip through a magazine intelligence barriers between countries are gone, I have featuring houses, kitchens, fashions or gardens. The had to re-analyze the changes in capitalism and my glossy pictures basically tell you what you “should look

    understanding of it. The following are some of my like” and where and how you should live. They create conclusions: new “needsby comparing what you should have to

     what you have. This is known as upheaval of prior

    contentment, greed and/or pride. 1. Capitalism is an “ism” like socialism, Fabian

    socialism, communism, and Marxism.

    2. Capitalism only works when there is honesty, I am told that long ago manufacturers determined they

    integrity and respect for others. When capitalism could make more money (profits) if products had a

    no longer has those virtues, it becomes certain life to ensure repeat business and continual

    communisticcontrolling, ruthless and only demand. This makes good business sense but is very

    worried about profits instead of the value of man. costly, especially if I am the one having to replace the

    item. Let‟s use cars. Every year, there is a new popular

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    model. I remember one year it was souped up trucks the powers granted by law or vested by custom, with truckers paying for special paint, oversized tires, to see that the money supply is neither too large jacked up rear ends, etc. Now it‟s the Lexus and SUVor too small for the maintenance of stable you just have not arrived until you look like everyone economic progress. In the United States the else. Personally I like Jaguars but drive a Volvosuch is long-run objective of the Federal Reserve life. System is to do its part in fostering monetary and

     credit conditions favorable to sustain high

    employment, stable values, and a rising level of Then there is technological change versus “last year‟s”

    consumption (emphasis added). model. The computer is an example of fast-changing

    technology. We laugh about the fact that the computer

    you buy today may be outdated either by lunchtime or by Where does the Federal Reserve get their money?

    They print it. Why can‟t the American people “forgive” tomorrow. Marketing tells us we need the newer one

    because it is faster or because it has more bells and themselves the interest charged on Federal deficits? whistles that reflect the newest technology. Because we owe it to a private corporation that has as

     its objective to make a profit from the interest they Capitalism always needs new markets. If it were not for charge for the money America borrows. If you think

    the death of communism, we would not have all of the about the concept of paying interest in perpetuity or former Comecon countries to develop and sell to. forever, it is feudalismat its finest. Thomas

    Furthermore, as a result of a borderless world, American Jefferson said, “If the American people ever allow private corporations have shifted many manufacturing and back banks to control the issue of currency, first by inflation, office jobs to China and India respectively. They hope to then by deflation, the banks and corporations that will build up those countries economically at our expense--grow up around them will deprive the people of all perhaps once we have waned, they can come back to us property until their children wake up homeless on the and build us up againcreating an endless cycle of new continent their fathers conquered.”


     So, if you were in a powerful inside position to know Now let us apply capitalism to the stock market. The old when the Fed was going to put money into the banking adage is, “Buy low and sell high.” Sometimes we are system, you would be able to “buy low” and conversely,

    able to do that. What makes markets rise and fall? The if you knew when the Fed was going to withdraw money two key reasons we will examine here are: (I.) The from the system, you could “sell high.” Having studied

    amount of money that is available in the banking system the market for over 20 years, I am amazed that it never that reflects the current policies of a country‟s central behaves the same way twice. There does not appear to bank and (II.) War. be any pattern than really makes sense. I am constantly

     astonished at how the stock market speaks. Daily we I. Market Cycles and Central Banks hear, “The market sent a powerful message…” or “The The market cycle or business cycle in the United States stock market signaled…” How do they know what the is as a result of highs and lows created by the amount of stock market is saying anymore than what dogs say money pumped into or taken out of the banking system when they bark?

    by the Federal Reserve. In 1913, Congress gave their

    authority to monitor and manage the monetary system of According to the website “SafeHaven,” the Federal the United States to a private corporation called “the Reserve has been pumping huge amounts of money into Federal Reserve.” This private corporation lends to the the banking system. For the week of May 30, they United States government by buying or selling our pumped in $46.8B. For the month of May, M3, the total Treasury bills which either puts money into the banking amount of money in the entire system, expanded by

    22.2% or $155B which is an annualized rate of $2T!!! system or takes money out. When there is a lot of

    money in the system, interest rates fall because money While it takes about one to six months for the extra is plentiful. As the Federal Reserve takes money out of liquidity to affect markets, never before in the history the system, interest rates rise. Easy money creates of money has this size of a monetary infusion occurred. market highs while tight money leads to stock market According to SafeHaven, the only other time that a six corrections. The following is from the Forward of a week period had this kind of infusion was when the Fed brochure published in 1939 by the Federal Reserve on pumped $170B into the system a week after the Attack

    their corporation: on America. This time, however, there has not been any

     kind of problem to warrant this kind of infusion. Are we

    [T]he main central banking function, however, is being prepared for something or is this a “get Bush re-

    similar in all countries. It is to endeavor, with elected” move?

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    Furthermore, it has been reported that Federal Reserve scheme but replaces it with many new tax breaks Chairman Alan Greenspan has made more trips to the designed to compensate for the loss. Currently the White House than ever before. As a result of the Attack House and Senate bills need to be reconciled. This on America and the Iraqi War, Greenspan has met with proposed tax bill includes the biggest corporate tax Vice President Dick Cheney seventeen times, Defense measures that will reduce taxes for American Secretary Donald Rumsfeld eleven times, National corporations from 35% to 32%. Said Rep. Charles Security Adviser Condoleezza Rice twelve times, White Rangle, “You can put lipstick on a pig, but you can‟t call House Chief of Staff Andrew Card six times, Secretary of it a lady. This is a lousy bill and it has nothing to do with State Colin Powell once, Deputy Defense Secretary Paul reform.” That is because both versions of the bill have Wolfowitz twice, and Cheney‟s Chief of Staff I. Lewis ballooned into sweeping packages that include a range Libby once. Greenspan has met with President Bush of new tax breaks, not only for companies that benefited once and has stepped up his visits to lawmakers on from the Foreign Sales corporation scheme but for a Capitol Hill, averaging 35.8 visits since 1999 versus 21.3 range of industries from film-makers to shippers and car visits from 1996 to 1998 (Washington Post-WP, 5/27/04, 1). dealers.

    With regard to deficits, Washington Post columnist In explaining his visits, Federal Reserve spokeswoman

    Michel Smith commented, “The Chairman believes a Sebastian Mallaby said, “The Gipper ran a deficit that central mission of the Federal Reserve is to contribute in peaked at 6% of GDP, dwarfing the current deficit of 4%. whatever way possible to the stability of the American As Dick Cheney reportedly declared, „Reagan proved

    economy. Although they are unelected officials, the deficits don‟t matter.‟” According to Mallaby, if all the

    Federal Reserve must be accountable to the American Bush tax cuts were repealed we would still face a “fiscal people as it undertakes that effort.” Perhaps it would be nightmare.” When the baby boomers start to retire in well to point out that the Federal Reserve has never 2008, Social Security spending is set to rise to 2% of published any kind of annual report for us to review. GDP between now and 2040 and if healthcare spending With regard to the debts, deficits and trade deficits of the rises 2.5% a year faster than wages, Medicare and United States of America, we need to see how Congress Medicaid will rise to a monstrous 14% of GDP by 2040. is spending our money. He projected that the budget deficit would grow to five

     times larger than the one we have now. Mallaby wrote, Debts, Deficits and Trade Deficits “More spending means more national debt. More debt It should also be noted that the Federal Reserve is means more interest payments. More interest payments becoming more vocal in politics and calling into question mean more spendingadding to the national debt that American policy. In May, Greenspan warned that the boosted interest payments in the first place. Tax cuts “rise in global trade and financial flows had enabled the force government spending up on debt service, US to run larger current account and fiscal deficits than increasing the burden of government on the private would have been possible in the past, stating that the (WP, 6/21/04, A19). The new corporate tax bill sector”

    [size of the] U.S. fiscal deficit posed a significant passed by Congress will inflate the deficit by more than obstacle to long-term stability.” He went on to say that $200B over the next decade.

    because the barriers between the nation-states are

    Trade Deficits down (my wording of his words), that has allowed “The

    U.S. to fund a current account deficit of 5% of gross The U.S. trade deficits continue to hit new records. In domestic product and a fiscal deficit forecast of 4.25% of April the trade gap was $48.34B as a result of continued GDP” (Financial Times-FT, 5/7/04, 4). The current account demand among American consumers for foreign-made deficit reflects the fact that the U.S. is spending more goodsdespite a lower dollar which makes imports than it earns and that demand for U.S. exports is not as more expensive. In other words, the goal of a lower great as our demand. Therefore, the U.S. needs to dollar was to make U.S. exports less expensive and attract $1.5B of net investment per day from abroad to more attractive with the desire that perhaps Americans cover the current account shortfall. would stop buying from overseas. The article that

     reported this huge increase did not attribute it to the Debts via Tax Bills higher price of gas and oil (WP, 6/15/04, E1).

    In mid-June the House passed a corporate tax bill that

    The Reagan Deficits totals $155B with the design to repeal government

    subsidies that the European Union says are in violation First, let me say I really liked Ronald Reaganhe made

    of WTO rules. As a result, Europe has slapped tariffs at me feel secure when he spoke, however, as I research the rate of 8% on some American exports. The bill his political and economic policies, I am terribly would eliminate a $4B annual tax break for large U.S. disappointed. The simple fact is that Reagan‟s tax cuts exporters known as the Foreign Sales Corporation which rewarded the ultra-rich are still affecting us today.

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    For example, in January 1981, when Reagan declared rising. I have heard that rates could rise to 2 ?% by the the federal budget to be out of control, the deficit end of the year and 3-4% next year. We live in a world reached almost $74B and the federal debt was $930B. of open borders. The bottom line is that if you want to Within two years, the deficit was $208B and the debt by create inflation you canall they have to do is pump 1988 reached $2.6T. In the eight years Reagan was more money into the banking system and if you want to president, the U.S. moved from being the world‟s largest create deflation--all they have to do is take money out of international creditor to the largest debtor nation. the banking system.

    Recently a member of Reagan‟s Council of Economic

    Summary of Market Cycles and Central Banks Advisers, William A. Niskanen said, “Debt does have to

    be repaid and foreign investorsprimarily the central This leads me back to “Pac Man Capitalism.” Capitalism,

    banks of Japan, Britain, and China own $1.7T of besides needing new products, markets and buyers, federal debt.” (Emphasis added) That, he said, “has also needs changing economic trends to facilitate made the country „terribly dependent‟ and „terribly change. Just think about that. The central banks of the vulnerable‟” (WP, 6/9/04, A11). world have the power to do just that. Under the guise

     of keeping inflation in check they can completely Recent figures released from the Federal Reserve for change the market environment around the world

    the first quarter revealed $1,653B or 50.6% of liquid as we are seeing now. They created the housing Treasuries are held by foreign investors (FT, 6/14/04, expansion by making cheap money available to create 15). In addition, foreign buying of U.S. Treasuries in the demand we have seenand the tremendous rise in April dropped 50% as the Bank of Japan has stopped the prices of homes. It‟s a good thing the Consumer buying dollars. Foreign investors bought almost 50% Price Index does not factor in the price of home less in U.S. Treasuries in that same month as well. ownershipbased on the prices of homes doubling in

     many places around the country in the last few years Inflation what that would have done to inflation? So therefore, Over the years, how inflation is calculated has changed. what is the Fed really fighting? Any old excuse will do. Through 1982, the total cost of home ownership was

    In a Letter to the Editor of the Financial Times, Grant M. factored in. Since then, the Bureau of Labor Statistics

    now uses “owner‟s equivalent of rent” which assumes Nulle, Research Fellow at the Ludwig von Mises Institute that part of the house is an investment and therefore not in Alabama wrote the following:

    all of it is applicable to inflation. Therefore, they use a

    “rent equivalent” cost. Interestingly enough, we are told As the U.S. Treasury‟s sole fiscal agent and the that the Consumer Price Index-CPI has risen by 3.3% on US lender of last resort, the Federal Reserve an annualized basis in the first quarter of 2004 versus boasts a monopoly over the issuance of bank 0.8% in the three months to December 2003. What this notes. Since its founding, the Fed has made means is inflation is annualized at 13.20% versus 3.2% persistent inflation a fixture of the U.S. economy. for the previous year. For May, the CPI rose 0.6% Under the Fed‟s watch, wholesale commodity

    because of rising energy and food prices. In May, price levels have grown tenfold and the money energy prices rose 4.6%, gasoline prices rose 8.1%, and supply increased 64-fold between 1918 and 1991

    (FT, 6/19-20/04, 8). dairy prices rose 6.8% while fresh whole milk prices rose

     14.7%. Obviously, none of this takes into consideration

    II. WAR the rise in the price of homes over the last three years.

    The second factor in changing markets is war. We are

    hearing about wars and rumors of wars at every turn. Building materials are up substantially because we are

    What does war do? It TRANSFERS WEALTH, is an now competing with China which is growing 10% a year.

    economic stimulator, and leads to a “king of the hill” Cement is up 1%, steel is up 21%, lumber is up 20%,

    mentality with regard to the power and might of the plywood is up $10 per sheet or more than 140%, wire

    victor. Interestingly enough, war is part of an economic mesh is up 50%, metal studs used to frame a wall are up

    mechanism that economist Joseph Schumpeter wrote 150% and drywall is up 25%. Demand--both here and

    about in his 1942 epic, Capitalism, Socialism and in China are the reason for the huge increases. As a

    Democracy which was required reading at Harvard result of the people migrating from the rural areas to the

    where he taught. Furthermore this book was required or cities, Chinese authorities are building one new city a

    suggested reading at some corporations. Schumpeter month the size of Houston to keep up with the demand.


     Rising Interest Rates

    The essential point to grasp is that in dealing with Currently the Federal Reserve has raised interest rates

    Capitalism, we are dealing with an Evolutionary to 1 ?% from a historic 45 year low because “inflation” is

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    process…Capitalism, then, is by nature a form or constituted a defense department at the United Nations

    method of economic change And not only never by assigning 42,000 soldiers or 7,000 soldiers from six

    is but never can be stationary…this fact is different countries to the Security Council. The man who

    important and these changes (War, spearheaded the UN report which recommended the

    revolutions and so on) often condition rapid deployment force was Lakhdar Brahimi who today

    industrial change. These revolutions are not is the U.N. consultant to Iraq. Until the G8 meeting,

    strictly incessant; they occur in discrete rushes there was very little action on the rapid deployment force.

    which are separated from each other by spans of

    comparative quiet. The process as a whole In Georgia, the idea of a global rapid deployment force

    works incessantly, however, in the same sense was presented under the guise of “peacekeeping for

    that there always is either revolution or Africa.” When I asked if this was related to the UN

    absorption of the results of revolution, both Millennium Summit recommendation, I was told, “Well,

    together forming what are known as business yes, they would be able to go anywhere in the world.”

    cycles” (emphasis added). Furthermore, as part of the rapid deployment force, there

     is already set up in Italy a training base and a logistic With this in mind, I would like to discuss the various wars center which will field requests for men, material and which are being fought around the world. The world other resources. At the closing press briefing, President today is waging war on two different levels. Since time Bush announced that the force would total 75,000 troops. memorial, we have had war. It is not new. How It should be noted that the G8 is comprised of WWII someone became “king of the hill” or king is because friends and foes: the U.S., Britain, France and Russia they had the strongest armies and were able to subdue on one side, and Germany, Italy, and Japan on the all their opponents. For example, the current British other side.

    royal family has had staying power as they first became

    ruler in 1066. Let us consider the following response to Recently, the United Nations General Assembly adopted some of the current wars in the world today. a peacekeeping budget of $2.8B for 2004-2005, of which

    $28.42M for the UN Logistic Base in Brindisi where all Previous World Wars requests for peacekeepers will be handled. Furthermore,

    ththe US has agreed to finance the cost of the Capital When we look at war in the 20 century, the total killed

    Master Plan to update the United Nations headquarters between World War I and World War II is over 69M

    building by providing an interest-bearing loan to cover people. World War I involved 23 countries while WWII

    the full cost over 30 years. The General Assembly also involved 65 countries. We are now confronted with the

    recognized America‟s $1B voluntary contribution to the War of Terrorism. If you travel by plane, you know all

    UN in addition to our assessed contributions. Obviously, about the fact that you and I are questionable suspects

    rising deficits mean nothing! until we go through security. The War on Terror has

     spurred the very invasive intrusions into our privacy. If

    U.N. Peacekeeping Missions you set up any kind of financial account, you now have

    I then decided to do some research on exactly what the to provide your drivers‟ license. Furthermore, there are

    UN was doing by the way of peacekeeping. The United major data banks which are now compiling a profile on

    Nations has a “UN Standby Arrangements System” each of us which includes not only driver‟s license and

    (UNSAS). UNSAS already matches commitments by any time we are pulled over--but all of the credit cards

    member states of specific resources within the agreed we own, how we pay bills, etc. There are grave

    response times for UN peacekeeping operations. concerns by many people, including myself that World

     War III is in the beginning stages.

    The UN has both peacekeeping and peace-building

    activities. Under each of these they have a number of Current Military Missions

    countries they are already actively engaged infor Global Rapid Deployment Force is a Global Army

    various reasons: Afghanistan, Cambodia, Central Most recently at the Group of Eight meeting in Sea

    America, Cyprus, the Middle East, Mozambique, and Island, Georgia, the heads of state agreed to set up a

    Namibia. Furthermore, there are Security Council “global rapid deployment force.” For the first time

    Resolutions backing up UN peacekeeping in since the Roman Empire, the world is going to have

    Bougainville, Burundi, Central African Republic, the a global army. This action goes back to the United

    Great Lakes Region (Africa), Burundi, Guatemala, Nations Millennium Summit held in September 2000. At

    Guinea-Bisseau, Iraq, Myanmar, Somalia, Tajikistan, that time the 189 countries which were represented by

    and West Africa. kings, princes, presidents, and prime ministers voted to

     allow the United Nations to strengthen its organization in

    a number of ways. One way was to set up what

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    If we take a look at the Congo, which is rich in diamonds Blackhawk helicopters promised by one country did not and as a result the center of continuous wars, the UN arrive in Afghanistan, the U.S. ran out of patience with Mission to the Congo began in November, 1999. The that country and paid the costs of transportation Special Representative of the Secretary-General and providing another country made the vehicles available Chief of Mission is an American, the Force Commander (FT, 6/25/04, 11). Again, rising deficits don‟t matter.

    is from Nigeria, and the Police Commissioner is from

    France. Authorized maximum strength includes 10,800 Today NATO has 26 members. It is the U.S. that military personnel, 134 civilian police and other spends $329,616,000 which is $1,138 per person or specialists in the areas of human rights, humanitarian 56.55% of the entire NATO budget. The UK, France affairs, public information, child protection, political and Germany spend $35,249M, $38,005M, and affairs and medical and administrative support. The 50 $31,565M, respectively. Together they only equate one contributors of military personnel include: Russia, China, third of what America pays. Is it any wonder that NATO Bolivia, Egypt, numerous African states, Spain, Ukraine, agreed on June 27 to provide military training for the and United Kingdom. There are 19 contributors of police interim government of Iraq. NATO Secretary-General personnel. Countries providing police include: Jaap de Hoop Scheffer said the U.S. was “hoping to Argentina, France, Morocco, Romania, Russia, and change the mission of NATO so it meets the threats of stTurkey. This same kind of global force exists in each of the 21 century” (WP, 6/28/04, A16).

    the above U.N. sanctioned peacekeeping missions.

    The Iraqi War Therefore, what the G8 called for already exists. Let me

    just point out that the U.S. does not appear to participate It was President George Bush who decided that Saddam by way of troops or materials. Hussein had to go. Without actual proof of weapons of

     mass destruction, the U.S. invaded for the first time ever, NATO a country that had not attacked ours. While there are thHaving covered the 50 anniversary of NATO in 1999, I those that say the Bush doctrine of pre-emption is in can tell you that it was pretty amazing to see officers in disarray, Robert Kagan of the Carnegie Endowment for military dress from Russia, Germany, Iceland, Poland International Peace said, “It‟s a fact of life in the and other countries working together in partnership. It international system, because of the reality of the was President Roosevelt together with Prime Minister proliferation of weapons of mass destruction. The Winston Churchill, who issued a declaration of common normal lead time that a nation has to protect itself is not principles known as the Atlantic Charter which led to the what it used to be so preemption will have to be part of creation of the UN in 1945 and then to the creation of the international arsenal (WP, 6/28/04, A17).

    NATO in 1949 with 12 countries. Article V, the

    centerpiece of the treaty, provided for the collective As we all know, Iraq is in chaos as evidenced by the defense of the member nations, warning that “an armed decapitations, attacks by Iraqi‟s throughout the country, attack against one…shall be considered an attack all aimed at killing American and/or foreign occupation against them all.” Its overriding purpose is to preserve troops. The photos of the brutal treatment of Iraqi the security of its member nations. While NATO prisoners at Abu Ghraib prison have not done anything became the collective defense against the Cold War to help our causewe who have the Constitution. Unlike years, their mission has been questioned as a result of the West, Muslims are very sensitive about sex and the end of the Cold War in 1989. In 1999, the Czech mixing nude men with women. This is not done. The Republic, Hungary, and Poland joined the Alliance which Red Cross estimates that 90% of Iraqi prisoners have originally began with Belgium, Canada, Denmark, been arrested by mistake. Lastly the commander of the France, Iceland, Italy, Luxembourg, the Netherlands, Guantanamo Bay prison was the commander of the Abu Norway, Portugal, the UK, and the U.S. Ghraib prison.

    In June, Icelandic security personnel took over the Economist and war expert Richard Maybury feels that running of Afghanistan‟s Kabul Airport from the German the marine loss at Falluja during the week of April 24 air force. According for Daniel Keohane, defense expert was the turning point in the war in Iraq. He says it at the London-based Centre for European Reform, equates the same magnitude as the Tet Offensive did in “Afghanistan is supposed to be the savor mission for Vietnam as it is a turning point in the war. Just recently NATO. The alliance keeps saying it is good at Mayburys opinion was confirmed by Secretary of peacekeeping. Even that is now open to question.” Defense Rumsfeld who compared the recent attacks in Part of the problem is that if a country provides assets, Iraq to the Tet offensive, a turning point in American they have to transport them which increase the cost. public opinion about the Vietnam War (WP, 6/28/04, A16).

    Therefore, the donor countries want another country to

    pay for transportation. For example, when the

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    Maybury also pointed out in his June newsletter that the 20% above the peak levels of Reagan‟s defense build up. last time marines were defeated in a major battle was at War costs and modernization are expected to drive the Chosin Reservoir, Korea in 1950-51. Furthermore, he defense budget to nearly $500B in 2005. In response to points out that we are using an all-volunteer army and this military buildup, Senator Bob Graham- D-FL said, not since the U.S. conquest of the Philippines in 1902 “the current defense budget „is consistent with the has the U.S. fought a war that lasted longer than a week Cheney, Rumsfeld, Wolfowitz view of the world that we using an all-volunteer army. will essentially abandon „soft power‟—diplomacy and use

     the international institutionsand will concentrate on

    Iraq is in the center of a Muslim dominated area. What „hard‟ power—military strength that we exercise alone.”

    America has done is providing the fuel for all able-bodied

    Muslims to go to the aid of their brothersregardless of Summary of War

    tribal differences. I don‟t think we have seen anything War transfer wealth, creates new cyclesinflation and

    yet. If we went in for oil, we can‟t leave because that deflation, and facilitates Pac Man Capitalism that is was the reason. The Persian Gulf contains 2/3‟s of the needed to keep markets up and money moving (called world‟s reserves. the “velocity of money”). The problem is that America

     has more debt than when we fought and financed World It is very apparent that a voluntary army is not able to War I and World War II. Our economic fate is not in our hold Iraq. It is rumored that after the elections a military hands. It is in the hands of those who hold our debt

    draft will be re-instated. Furthermore, there is money in both personally and as a country. According to Bill Gross

    the Bush budget for this. Lastly, let me say that some of CIO of PIMCO, the world‟s biggest bond fund, “Too the top manufacturers of military weapons include the much debt, geopolitical risk, and several bubbles have Russians as well as the Chinese and North Koreans. created a very unstable environment which can turn any Since everyone is a member of the UN and Russia is a minute. We have become a leveraged global economy, G8 member as well, could it be that we aren‟t as “buddy-specifically in Japan and the U.S. With all this consumer buddy” as we think? debt, business debt, government debt, smaller

     improvements in interest rates have a magnified Future Wars effect…a small movement can tip the boat.”

    Five hundred and fifty-five days after September 11,

    CONCLUSIONS 2001, we invaded Iraq. If this is the beginning of World

    War III, it is more than 57 years after the end of WWII. Let me repeat what William A. Niskanen said “Debt…has We were given three reasons by President Bush as to made the country „terribly dependent‟ and „terribly why we needed to go to war with Iraq: (1) to eliminate vulnerable.‟” My favorite portfolio manager, Jean-Marie Saddam‟s weapons of mass destruction, (2) to diminish Eveillard co-manager of the First Eagle Funds, recently the threat of international terrorism, and (3) to promote remarked, I think the world is in disarray. And not just in democracy in Iraq ( Currently political or military disarray, but potentially in economic there are 29 countries involved. Like World War II, the and financial disarray. Tremendous imbalances have U.S. is teamed up with Britain. developed during the bubble years. The bubble burst

     four years ago and on the surface, things look good but With regard to military movements, the navies of Britain, you are still looking at a gigantic U.S. current account Australian, China, France, India, Indonesia, Japan, deficit with extraordinarily high consumer debt and I South Korea, Pakistan, Sri Lanka and Vietnam are all believe it is only bearable because interest rates are sending ships into open seas, instead of keeping them in low.”

    harbor. The U.S. has more than 90% of her ships at sea.

    Iran is reportedly amassing troops along the border of Because we have not repaid our debt, we have no Iraq, the Pentagon has announced a plan to withdraw its choice but to continue to use it to ensure Pac Man two Army divisions from Germany and the Pentagon is Capitalism continues. The question is, “At what price?” going to move the 20,000 marines stationed at Okinawa The bottom line is that war is going to continue for the to Australia ( reasons cited above. Perhaps we could call the tension

     between capitalism and war, “permanent revolution.” Defense spending today is the highest it has been since This is a term Lenin used. This tension is also the Reagan Administration. Congress plans to spend recognized by David Horowitz, a Bush II campaign $1T over the next decade on futuristic planes, ships and strategist. Therefore, defense, gold, silver, and weapons with little direct connection to the Iraq War or investments outside of America are appropriate. the war on terrorism according to the Washington Post,

    (WP, 6/11/04,A23). The 2005 defense authorization “God is our refuge and strength, a very present help in measure contains $68B for research and developmenttime of trouble, therefore will we not fear.” Ps. 46:1-2a

June, 2004 - VFSI Economic Newsletter - Page 8 of 8

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