Investment Capitalist

An Iranian Peacock Revolution and its Global Macroeconomic Implications
by Mark Etwiz
www.InvestmentCapitalist.com

Three former colonial masters of Iran (France, England, U.S.) stare down two rising superpowers (China, Russia) with Iran as their battle ground in a clash of civilizations. As history is any guide, Iran has a notorious track record of dominating regional politics of the Near and Middle East. The west backed Saddam Hussein in his use of chemical weapons against massive waves of unarmed Iranian child soldiers. In the grand scheme of geopolitics, arming the Germans as a way to appease them from the guilt of enforcing a brutal Versailles Treaty was no different than arming Saddam in 1980, when it was him or the Ayatollah. The end of the First World War, which led to a major national humiliation for the German people and a total collapse of the German economy, was a time that required pragmatic thinking by our leaders. Arming Hitler while the concentration camps were filling up with bodies is disgustingly similar to providing military and financial aid to a dictator using chemical warfare on his own people 40 years later.

Have times really not changed since War II? The same families are running the United States but now, we are the most powerful democracy in the world. There is a growing spread of capitalism as globalization profoundly takes root in China. Concurrently, archaic customs and religious beliefs are eliminated in the name of improving overall living standards, creating a reliable labor pool from which to fuel future economic growth. The two-party system creates a balancing act between selfish (i.e. imperialistic, unilateral) policies and utilitarian (i.e. social welfare) policies for the nation as a living organism. A pragmatic approach would see things in a particular light. Forget about the so called “Sunni vs. Shi’a” rift that doesn’t really matter. We must not repeat the same mistakes of the early eighties when America’s “lesser of two evils” strategy compelled the massive arming of Iraq only to have to go in there later and take the weapons out in exchange for the lives of young Americans.

We’ve seen the Orange Revolution in Ukraine, the Velvet Revolution in Czechoslovakia, the Rose Revolution in Georgia, the Saffron Revolution in Burma, and the list goes on. Why not a Peacock Revolution in Iran? To punctuate this point in the current conflict in the Persian Gulf, the US Navy and Air Force are sitting idly by on full tactical alert and readiness, serving as a sharp sword of diplomacy. Persians, which make up the majority of the Iranian population, are a proud type, and that includes their government. This is why a monarchy worked so well for over 2500 years. The current government in Iran can barely manage to unite the people by nationalizing the nuclear issue as a symbol of independence. But take the focus away from this issue, as the American’s have keenly done with the most recent release of the National Intelligence Estimate, and the Iranian people will look inward and see a domestic economy decimated by waste, corruption and decades of sanctions. The cost/benefit analysis will suddenly shift and the Iranian Theocracy will collapse on its own weight, or so we all hope. The ideal scenario is one which Iran is not invaded or bombed, theocracy as a form of government joins its fallen comrades in the same cemetery holding Leninism, Fascism, and Monarchy; and Iranian hegemony in the region is encouraged if not granted through treaty. The last statement has to do with the Iranians’ forgotten role as the founder of human rights, freedom of religion, expression and proud protectors of truth and justice. Even our Founding Fathers based the Declaration of Independence and the Constitution on a deep understanding of ancient text held very dear to every Persian heart: “Cyropedia” by Xenophon is the philosophical opposite of Machiavelli’s “The Prince”.

The Iranian culture “is America’s cultural sibling”, according to Condoleezza Rice. Now that modern fascism in the form of theocracy has overtaken the birthplace for the declaration of human rights, America can make a significant difference by electing a female President. This would empower repressed victims of gender apartheid throughout the Middle East and especially Iran where power is held by the few. The government in power is at best a poor example of Persian fanaticism gone wild and at worst a clash of civilizations: Capitalism and democracy as the beneficiaries and main drivers of globalization versus theocracy and a book to enforce views on the inferiorities of man. This clash of civilizations being fought in Persia (Iran + [Iraq + <any>istan + Yemen + Bahrain + Azerbaijan + Armenia + Syria]) can have a significant impact on the global political order for the next century and beyond. To most expat Iranian “technocrats”, Iran must embrace modern capitalism if she is to realize her true potential. Persians are a very cultured group of people, and understanding them at the core is the best way through this quagmire. With a ruling minority of clerical figures in power which usurped government based on false promises and expectations, the people have moved beyond the religious fanaticism of the 70’s. Brought about by persistent global stagflation and oil shocks, the idealistic resentments that lingered well after the CIA backed coup of Mossadeqh in 1952 have all subsided. The anti-western attitude among the popular masses is history. That part of the world is now experiencing an unprecedented renaissance. The Iranian regime is prepared to pursue a militant path if challenged, while the world is trying to move away from warfare as a form of conflict resolution. Fortunately, Iran is also the only democratic state in the Middle East (albeit borderline) and the people might have their way upon the death of the ailing Supreme Leader Ayatollah Khamenei by abolishing the “Supreme Leader” entirely.

We are at a very similar crossroads today to where we were just prior to World War I when choices made by the foreign majors led to the massive arming of a future enemy. Fascism and theocracy have many things in common, except in the former people hold their leaders accountable by hanging them in brutal revolutions. But in the latter, leaders invoke a higher authority as true bearer of responsibility for conditions in their country. The recent $36 billion arms package to Israel and Saudi Arabia should be raising many concerns. Is not the American government the largest customer for military hardware this world has ever seen? Is it therefore not enough that they must go and shop these older generation arms to the Arabs, who pray five times a day for the destruction of the United States while giving identical gear to the Israelis?

The root of the problem is radical Islam. Islam believes in the spread of a religious theocracy which is superior to national sovereignty. For this reason, I believe arming the Saudi’s under the auspices that it will counter the growing threat of Iranian regional hegemony is disingenuous, equal to a “death by a thousand cuts”. American political diplomacy has a tendency to make a mistake during crucial moments, thus leaving a mess for the next administration. I’ve learned to understand war as a macro-political economic lever to be used during times of economic contraction, and have tried to bring attention to this point repeatedly. America is at a crucial juncture because Iran has put forward the idea that any attack by the United States, or even better Israel, would evoke a transnational storm and Islamic fury the world has never before witnessed. In doing so, Iran would become the symbol and the “raison d’être” of ultra-radical Islamic fundamentalism. By countering one branch of Islam through the arming of another branch, future generations, and certainly American soldiers, will have to deal with a bigger mess. When the petroleum has been depleted and the world is running on hydrogen, the Middle East could be a brewing pot of turmoil, war, death and violence. All of which disrupt modern capitalism when there is no greater macro-economic good.

The 2003 invasion of Afghanistan and subsequent invasion of Iraq were both out of economic necessity. Deep in the midst of a bear market further punctuated by September 11, the stark reality of a deep and protracted recession was frightening. The global macro impediment to bringing aid to the U.S. economy was a stubbornly over-valued US Dollar. The recession was not only becoming unavoidable, but policy makers had less flexibility to deal with it due to artificial currency manipulation by China and Japan. The most efficient way to bring down the value of a currency is to print it. There are several channels to pipe this new money into circulation but each pipeline has a different social cost that must be considered.

Pumping money through loans via the capital markets can cause rapid price inflation in assets such as stocks and real estate as well as some precious commodities. This “hot” money usually goes to the investment funds and does not get to the parts of the economy where it is most needed. Pumping money through tax cuts can work only to a certain extent. When people are unemployed for a long time, the tax cuts don’t reach them. Moreover, the Republican administration thinks it is better at spending the money than the people themselves. The cost of Katrina to American taxpayers was the equivalent of $475,000 for every single man, woman and child in New Orleans, or roughly $1.275 million per family. That would be enough for most families to rebuild their lives rather than the tragic mess that exists today with over 100,000 empty trailer homes sitting on government land somewhere while thousands remaining displaced.

A sharp slowdown in the economy tends to reduce gas prices thus giving people more money to spend. Increasing discretionary income via declining gas prices will only work within the context of a strong dollar policy, counter to what the US needed in 2001. After 8 years of prosperity, the strength of the US dollar was crippling manufacturers. With the plunging value of the US Dollar, American goods are competitively valued, as is tourism to America. With the dollar heading south, the capital markets have gone into reverse, and where a normal trajectory involves dollars flowing out, now dollars are flowing in. Just search for the term {Abu Dhabi + private equity United States} and substitute “Abu Dhabi” for any Arab Emirate.

There are several other routes that can be taken for an expansionary monetary policy, but the one that works fast and is sustainable because it comes with a blank check from Congress: War. Military spending is an untouchable Keynesian dogma which conservatives embrace. Although there would be significant economic costs to war, including oil at the $200 per barrel level, and further damage to an already weakened dollar, any sudden joblessness can be offset by an expansion in military recruiting efforts. With this generation of recruits, the military is focusing on technical education involving satellite communications, robotics, cryptography and programming. When these young adults enter the work force, they will have very unique technical skill sets. The kind of skill sets where companies that are hiring find value. Another benefit is the transference of technology from the military to private companies for commercial exploitation.

With all that said, we must look at the current situation through the eyes of Keynes himself in order to best determine what the likely outcome will be. First and foremost, the Fed has reversed its policy of tightening with several rate cuts in the past 6 months. Therefore, any support for the US Dollar from tight monetary policy has eroded and will continue to erode as long-term trends push the economy into recession. From a fiscal policy perspective, the annual defense bill is approaching $400 billion. With both monetary and fiscal policy now acting to weaken the US Dollar in concert, it appears the necessity of war as an economic tool is no longer required. So it was no real surprise when the NIE report announced Iran had given up the pursuit of nuclear weapons since 2003. Furthermore, a “peace dividend” will surely result from a long-term resolution to the Iranian problem.

In closing, I will defer to the great Karl Popper: Prague lecture, 1994:

I think that all lovers of peace and a civilized life should work to enlighten the world about the impracticability and inhumanity of that famous - or shall I say it notorious? - Principle of National Self-Determination, which now has degenerated into that ultimate horror, ethnic terrorism. We must fight against such horrors. We must not fall prey to the cynical view that history is just violent and horrible, driven by the lust for gold and oil, for wealth and domination. This cynical interpretation of history is not true. European History begins with Solon’s peaceful revolution that reformed the Constitution of Athens. By it, he freed those slaves that had been free citizens but had lost their freedom to their creditors whom they were unable to pay. Solon’s revolution prevented this from ever occurring in Athens again. It was a long way from there to America and to Abraham Lincoln who fell as the last of the 600,000 white soldiers in a most terrible war that succeeded in freeing the negro slaves in the southern Confederate states.

These are not just two exceptions that happened in an otherwise endless history of greed and violence. Rather, these are some of the important successes – admittedly not very frequent successes – among the many defeats and set-backs we have suffered, often through our own mistakes, in our ceaseless struggle for freedom and justice.

And now, when we are again suffering some of these set-backs, we must think of our very latest success: South Africa. And we must keep fresh before our memory such incredible achievements of the spirit of freedom, openness and humanity, as that of Churchill’s seemingly hopeless resistance to Hitler, after the fall of France, and of Masaryk bringing back his valiant soldiers, an army of 60,000 men, through Siberia and Vladivostok, and across the Pacific Ocean and the American continent in order to found a great republic, an open society, strong enough to rise again after many a violent death.