Should We Bomb Iran

"Iran's WMD is the impact a war would have on the world economy once Iran is attacked."
- Barry Ritholz, "The Big Picture"

There must be something in the drinking water in this country that makes people stupid. Seriously. The only reason we seem to like war so much MUST be because of something in the drinking water. In actuality, I think Americans like war because it's always "over there". They don't see the real horror. Other than 9/11 and the Oklahoma City bombings, America has been extremely lucky about war. As a result, it seems more like "entertainment" to most Americans than what it is.

That being said, we now have the Republican candidates criticizing Barack Obama for not being tough enough on Iran and their nuclear program. They would "take action". They are beating the war drums. George Bush didn't do a thing about the Iran program -- he was too busy losing the Iraq war. He didn't do a thing about North Korea either, and they actually exploded a lame bomb. So why are they beating their war drums? Political expediency, of course. They are trying to create a new reality show for the morons, I mean their constituents, who like this sort of thing.

On the other hand, there is a real situation with Iran that has to be monitored. The first question is, Is Iran really building a nuclear weapon? The answer is almost certainly yes. We know this because of the method of enrichment they are implementing. It's not used to enrich uranium for peaceful purposes. It's used to enrich weapons grade materials. Therefore, the conclusion MUST be that they are building a nuclear weapon.

The next important question is, Why are they building a nuclear weapon? If you ask the Republicans it's because they are madmen and terrorists, Islamic extremists and so on. But the answer is much, much simpler. They are building a nuclear weapon to keep from being attacked by the West. Note that no nation that acquires a nuclear weapon has ever been invaded or attacked. The Iranians are not madmen. They saw what happened to Iraq, and they know they were next. If the Republicans win in November, they know they ARE next. Even the Israelis acknowledge that there is a point after which they can no longer safely attack Iran. This point ultimately is when Iran tests its first device...because then they probably have multiple devices and those could be deployed in any number of ways. Notice also that many countries around  Iran have nukes -- Pakistan, their unstable next door neighbor: Israel, their other unstable next door neighbor. What reason can the world give for NOT allowing them to have a nuclear weapon? They are certainly in far better shape than Pakistan.

So we've established they are building a bomb and seem to have rational reasons to do it. We've taken the position that we have to do something about it -- but what? Is war the answer? What does "war" mean in this context?

First of all, one thing no one is talking about is how much a war with Iran would cost. The Iraq war cost us about $1 trillion directly. How much would a war with Iran cost? What would be the objectives? What does victory look like? What's the exit strategy.

I imagine the objective would be to end or at least delay the Iranian nuclear program; it would be accomplished by bombing several Iranian nuclear sites; it would require action to keep the Straits of Hormuz open; it require a close-ended campaign and would have a definite end scale, regardless of accomplishment. That being said, the BEST CASE scenario, based on rapidity of the US advance in the Iraq war, is that the attack would cost a minimum of $50 Billion dollars. That does not include the economic impact of the war, the run up in the price of gas and oil and so on.

Many other commentators have already stated that the 100 or so planes the Israelis could bring to bear would not be enough to do the requisite damage to the Iranian nuclear sites. Therefore, heavy US bombers, such as the B2 and the B52 would be needed. If air superiority could be achieved, the Israelis could modify C130 type cargo planes to drop bigger munitions but the risks are huge. So assuming the US involves its bomber fleet, it would mean flying from Guam, England and Germany at a minimum and possibly Italy, Spain and Turkey. Rumors state the Israelis are entering into agreements with Cyprus and Azerbajan to use their airfields and airspace.

It's important to discuss the Straits of Hormuz here. The straits are about 30 miles across, but ships can only pass through about a mile of it, so its rather narrow. Something like 30 percent of the world's oil passes through the Straits, but not US oil. Therefore, China, India, Japan, South Korea and so on have an extremely vested interest in keeping the Straits open. There will be enormous pressure on the US to insure the Straits are  not closed once the shooting starts. This would mean the entire fighting strength of more than once carrier group to knock out Iranian naval ships, as well as command and control centers on the shore. There is absolutely no doubt that US Marines will have to be employed to capture, destroy and abandon many ground installations. There would have to be a concerted effort to neutralize Iran submarines before they damage US ships or even sink themselves in the Strait. Oil laden ships might also become targets of the Iranians. Radar and fire control sites, as well as missile launchers, and Iranian Air Force assets would have to be neutralized. The United States would be hard pressed to suppress and destroy this large number of targets in such a short time. No doubt cruise missiles and other remote assets would be involved. It would take multiple days and thousands of sorties. It would be reasonable to assume US casualties to planes, ships and men. It's likely there would also be collateral damage to tankers in the Gulf and it's highly likely that traffic in the Straits would be halted for some amount of time, whether its days or weeks depends on the determination and capabilities of the Iranians.

My assumption is that the absolute best case would indicate an attack of duration of a week. What would be the ramifications? As soon as the attack became known gold would skyrocket; US bonds would collapse; oil would skyrocket and gasoline would spike. In addition, the US debt would increase as well. Over the next week we would see diplomatic protests against the US from China and Russia, and possibly India. We would hope they would not create mischief. No doubt Iranian exports would stop for awhile, roughly 2.5 million barrels per day. An additional 20 millions barrels would be halted from moving through the Straits for a period of time. This would not only cause huge price spikes but real hardship in many parts of the world...shortages, layoffs, industrial failure, unemployment, recession, debt. The longer oil failed to move the worse the impacts would be. This is the true WMD of Iran.

No doubt within hours or days of a US attack, the Mahdi Army in Iraq would revolt. It's possible the US might have to send troops back to Iraq to keep the government from falling. Much of Iraq is pro-Iranian now and it's possible Iraq would fall into all out civil war. It's likely Iran would be able to fire many of this medium range missiles, possibly hitting targets in Saudi Arabia, possibly Kurdistan, Turkey, Kuwait and the UAE. If the missiles hit oil fields or oil production facilities, the resultant loss of oil would be an even bigger hardship to the world.

It is possible that Iran could disperse its three former-Soviet submarines into the world where they could target tanker lanes, sinking tankers until they were located and destroyed. The impact of this would be more to cause the insurance rates for tankers to skyrocket, something that is passed on to the cost of each barrel of oil.

Within a couple of weeks, much of Iran's offensive capability would be destroyed. Pakistan would be in turmoil with massive Al Qaeda and Taliban sentiment. It is extremely possible that Pakistan would be engulfed in civil war or revolution, with the Al Qaeda faction winning. Under these conditions, the US would be forced to invade the nuclear dumps in Pakistan and seize their nuclear weapons. It would not do any good to bomb them because we would never be sure to have eliminated these weapons. It would be necessary to attack, invade and hold until we could account for the weapons. The fury of the Pakistan citizenry and army should not be under-estimated. They could strike back at US assets or even India. Afghanistan would likely devolve into anti-American violence.

It seems likely that Hamas would launch an all out attack on Israel. There would be 100s of rockets launched at Israel, causing massive retaliation against Hamas and Lebanon and possibly even Syria. The question would remain as to what Egypt would then do. There is already an unhappy truce between Egypt and Israel and there would most certainly be a price to be paid. What that price is, no one knows.

After a month or so, the US would have assessed the success of the raids. At this point the US would either have to renew the attacks to insure target sites have been neutralized or they would have to offer an olive branch to the Iranian government. The way Iran has its military sites would mean significant civilian casualties. This may drive the citizenry to support the government and launch a far-reaching hatred against the US, in ways that would not become clear for months or even years as retribution is taken. "Death by a thousand cuts" is not something to be dismissed lightly. Iran would have suffered many billions in damage. What would be the de-escalation process be then? Would we just wipe our hands and walk away? There is no doubt that multiple carrier groups would have to be deployed in the Straits for months after the attack.

Back at home in the US, gasoline would possibly be in the seven to eight dollars a gallon range. This would be a huge hardship to Americans. The price would take up to 125 dollars a week from American family pockets. The economy would slow down considerably. Layoffs would grow. Car sales would collapse. Import prices would grow rapidly. It would mean a serious recession. The site "Political Calculations" uses a formula that determines the impact of gasoline prices on unemployment. According to their formula, a price of $7.50 for gasoline would result in a direct unemployment rate of about 17 percent, with a total unemployment of 30 percent or more. The country would be in free fall. The resulting collapse in tax revenues combined with the cost of the war could easily add 500 billion to the deficit within the first year after the war. We could see 1.5 or 2 trillion dollars in total deficit spending within a year when you add the new deficit spending to the existing deficit spending. It would be a spiral of failure leading to a collapse of functional governance. The government would have to dissolve at least 1/2 its cabinets, with resulting layoffs and chaos within the states. The dollar would no longer be the reserve currency because it would be worthless. Eventually, no one would be lending money to the US and interest rates would look like those in Greece. On top of all this, the US would have to be on constant guard from Iranian attacks, Al Qaeda attacks and other extremism in all its forms.

The US would have to pull back from so many obligations and the hardships within the country would be those that have not been experienced since the Depression, if ever. This would open the door to rampant Chinese expansionism. In addition, its possible Europe would be in free fall, opening the door to Russian expansionism and mischief, and the US would be in no position to thwart them. It's possible the US would declare bankruptcy, but this seems radical in the first year. It's possible it would happen in Year 5, however.

Perhaps this sounds extreme, but it's not that far fetched to believe that any, if not all of these things could happen. It is extremely likely that an attack would result in a US recession or depression and the US cannot take too much more debt right now -- not without some major restructuring of how the US government does business.

In the end, the Iranians will have exploded not their nukes but their economic WMD and when they do the winners will be the Chinese and the Russians and the loser will the Europeans and the Americans. War with Iran would be suicide. Let's not do it. 

The Economics of Disaster

"It is better to be vaguely right than to be precisely wrong."
- William Carr, the "Economic Journal", 1942

My goal is to be at least vaguely right. I spend a great deal of time reviewing the economic pornography that is increasingly available on the internet and subscribe to a number of economic journals, such as "The Economist", which when I was in college studying to be an Economist was a scholarly journal and has devolved over time to tripe.  As a result I am often asked what's going to happen with the US economy and the world as whole. It's an impossible task to get right, so I settle for 'vaguely right'.

Unfortunately, I am willing to bet large sums on my current conclusion that I will be better-than-vaguely right.

Here it is: Despite the encouraging signs in spending, unemployment and growth, the economy is heading for disaster, probably in the June 2012 time frame. I am so certain of this that I have told my accountant to move all of my substantial retirement savings to cash or cash equivalent securities. The stock market is going to fail, probably starting in May.

I hope I am completely mistaken. I want to be so wrong as to be a laughingstock.

But all indications are the opposite.

- SP futures are predicting losses in June
- the ECRI index indicates a declining business cycle and recession by November at the latest
- gas prices continue to rise, which will cripple any recovery
- housing prices continue to fall, and even though they keep falling, few people are buying
- Shiller predicts a large, if not massive, increase in foreclosures over the next few quarters
- velocity of money is at record lows, not just in the US but in Europe and China
- US exports have slowed and as things get worse the dollar will get stronger, making exports harder
- US savings have declined again -- people are buying more on credit

People note that there are encouraging signs also -- the S&P volatility index is low, indicative of growth and I was encouraged by this new news that maybe S&P futures are wrong, but the housing and gas prices are the true bellwether. As long as housing is low and gas is high, people will not spend. We see this in the velocity of money. People are NOT spending. We are heading to deflation despite the huge amount of money treasuries all over the world are printing to prime their economies. We're heading for a cliff and I don't know how far down it is, or even what is at the bottom. But I know it's not good.

People have noted that gold prices have fallen by record amounts. That seems to indicate stability since gold prices are driven by fear and inflation, but the conventional wisdom is that because Ben Bernanke has not mentioned a QE3 at his past 4 Fed meetings that he is either more upbeat about the economy or scared because the Republicans have called him a "traitor". I don't think it's either of those things. I think Bernanke is saving this bullet for when things start to tank over the summer. That's when he will pump a ton of money into the economy in a last gasp to get people spending. Then gold will rise again.

What does it mean? It means people will be pouring money into US bonds. Yields will collapse and it won't matter because even at 0 percent interest, having the same amount of money is better than losing it in the stock market. The dollar will get stronger, thus throttling the US export market, slowing the US economy further. Unemployment rises. Confidence falls. Housing collapses further. GDP shrinks. Recession results.

The economy is NOT going to improve until housing improves. Period. Housing is not going to improve as long as unemployment is high and people are scared.When people have confidence again, they will take risks. When they don't, they don't spend. It's self fulfilling failure. This was the true triumph of Ronald Reagan -- even though he actually made the underlying economics of the US much, much worse, he made people BELIEVE their lives would get better, and when they did, they spent and invested and created prosperity. Unfortunately, they were eating the seed corn of the future, but they didn't know that then. Here's a great quote from the Aeneid by Virgil, 2000 years old and sums up the situation: "Success nourished them. They seemed to be able and so they were able."

The problem is that Reagan and Bush, father and son, have spent all of the future seed corn we would otherwise be spending now to fix our problems. Our debts are way too large now to address the problem. Our options are limited. I will discuss them in tomorrow's blog.

It's important to note a couple of things about gold and this market as well. The big elephant in the room is Iran. Are the Israelis going to bomb Iran? Will the US join them? If any kind of aggressive action of this nature occurs then gold will hit record levels; gas will hit 6 or even 7 dollars a gallon and the US economy will collapse into recession if not complete depression. I don't think there will be an attack, at least not before September. Netanyahu has indicated he will wait a little while longer. President Obama's current sanctions don't fully come into force until July and already the Iranian economy is collapsing. The citizens are angry and new elections have been called. It might be possible that if the Iranian economy does collapse the Iranians will agree that no nukes is better than civil war and starvation. The wild cards are India and China who have agreed to pay gold for Iranian oil regardless. This gets around any Obama sanctions and provides hard currency for the Iranian regime. It also undercuts the US dollar as the reserve currency. This is a major shot over the bow. The US needs to be preparing for a time when the US is NOT the reserve currency, and all that entails -- higher prices for imports, slower economy, less prestige and power over world events. Russia and China are actively trying to make this happen, and I was surprised to see India sign on as well since they are an ally of the US, but the fact is, a crack addict does not make a loyal friend to anyone but the crack dealer and India needs oil badly, and Iran is their friendly crack dealer.

In the end, this will put a 12 - 20 billion dollar pressure on gold. Gold SHOULD respond by mid-summer by going up. It also increases the chances that Israel or the US will bomb Iran with all that entails.

That's all I have to say for today. I want to be wrong.