Outside the Box

The State of the World: A Framework

John Mauldin

February 23, 2012

Companies issue state of the enterprise addresses, and presidents issue state of the union addresses ... but you've got to be pretty confident to address the state of the world. Luckily for us, Stratfor founder and CEO George Friedman is just that confident – and it's well-deserved.

George is the expert in geopolitics, and his company is the best source out there for geopolitical analysis. Thus, his recent article, "The State of the World: A Framework," is well worth a thorough read. It identifies three distinct phenomena the world is facing: the European financial crisis, the Chinese export crisis, and Iran's rise to power in the Middle East.

One of his most interesting points, and one that I'm inclined to agree with, is that the most powerful country in the world – the United States – is currently unprepared to deal with this new reality. Something to keep in mind as we enter election season ...

Some of you may know that Stratfor was hacked several weeks ago. While they rebuild some infrastructure, they've got an open-house website – you can access the content that's usually only available to subscribers. You may want to take advantage of this opportunity by visiting www.stratfor.com before they lock up the house again. I particularly recommend their 2012 Annual Forecast.

Your wondering whether I'll have Greek, Chinese, or Iranian food tonight analyst,

John Mauldin, Editor
Outside the Box

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The State of the World: A Framework

February 21, 2012

Editor's Note: This is the first installment of a new series on the national strategies of today's global power and other regional powers. This installment establishes a framework for understanding the current state of the world.

By George Friedman

The evolution of geopolitics is cyclical. Powers rise, fall…

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Ned Bright

Feb. 26, 2012, 9:14 p.m.

George Friedman’s essay is a bold attempt to delineate the Big Picture, but it falls far short of its goal in my eyes.  Here is the picture I wish Mr. Friedman had painted.

The genie is showing signs of escaping the bottle.  The natives grow restless.  The Islamic nation which stretches from Casablanca to Karachi has heretofore been kept in handcuffs by local dictators, nearly all paid stooges of the West. The British and French exited the scene years ago leaving Uncle Sam to rule over a gaggle of far-flung provinces belonging to a decayed Western empire. Uncle is clearly losing his grip,

â??Unbalancedâ? when used to describe America’s exercise of its imperial role should read ‘disastrous’ in my opinion.

Why is Iran the dominant power in the Middle East as Mr. Friedman avers.  It is because the U.S. took out Saddam Hussein, thus removing a valuable counterweight to Iran. Saddam’s wars with Iran kept the Ayatollahs in check. Furthermore, Saddam, a Sunni was a natural friend of house of Saud.  Now, thanks to a misguided U.S. intervention, Shia hold the power in Iraq, while Iran, a Shia nation, now enjoys influence right up to Saudi Arabia’s borders.  Mr. Friedman does not seem to be aware of Israel’s nuclear warheads (estimated at 200.) Surely this fact (the source is an Israeli who spilled the beans to an British newspaper years ago. Mordechai Vanunu has spent the last 18 years or so in captivity in Israel.) must figure in the Mideast equation.

Another significant factor curiously missing from Mr. Friedman’s analysis of the Middle East is the petro-dollar.  The worth of the U.S. dollar, with no other backing, is effectively discovered in the market for oil; X-number of dollars equal one barrel of oil. The U.S. dollar is the world’s reserve currency very largely because virtually all oil is traded in dollars.  Despite lip service given to a â??strong dollar’, the dollar is in a secular downtrend reflecting the low interest rates, the quantitative easing, and the large deficits—the New Normal in the States. Consistent dollar weakness and a corresponding higher, dollar-denominated oil price has prompted China and India, for example, to buy oil from Iran and Venezuela in their own currencies.  This shift is of more than casual interest because it threatens the status of the dollar as the world’s reserve currency and equally the considerable privileges which go with it, particularly the privilege of printing money without limit.  â??Its our currency, and it’s your problem.â?  Perhaps not any more.

There is excess credit/debt in China and subsequently a rampant inflation in the country as Mr. Friedman notes.  The inflation is in considerable part imported from the U.S. . Chinese exporters must convert dollar payments to yuan and the Chinese central bank must print more yuan to satisfy this demand.  Yes, the Chinese are carrying a lot of debt, but given China’s growth rate and its trillions of foreign reserves, the Chinese are well able to carry and eventually retire that debt in my opinion.  Additionally they have a large population, the majority of which have yet to get hold of their first credit card.  This puts paid, I think, to the argument that China cannot suffer a contraction in its global export market.

American commentators are too busy, in my view, painting pictures of doom and gloom as respects the EU and China, when they should be studying the ground under their feet.

Even the dogs in the street know that the U.S. economy runs on CHEAP oil from the Middle East just as it runs on cheap food grown at home and cheap hardware from Asia.  Surprisingly those in charge in Washington know this too.  Unlike some however, those who have their hands on the levers want to perpetuate this sorry situation which (1) has made American dependent on oil imports, which (2) has pegged the dollar to the price of petroleum (the ‘petrodollar’), which (3) has caused the rundown of our industrial capacity and the jobs and export earnings which went with it, which (4) has created a corn-fed, obese, diabetic populace and fattened many a fat-cat farmer with subsidies, which (5) has put the country at the mercy of Chinese creditors who are patiently arranging to depose the dollar from its throne and strip the U.S. Treasury of the considerable privileges which go with the unlimited printing of the reserve currency of the world.
I wish that that American commentators, advisers, and policy makers saw the Big Picture, and not ‘as through a glass darkly’, as they say.

DICK CHATFIELD

Feb. 25, 2012, 1:47 a.m.

The collapse of the Soviet Union did indeed present us with unique world leadership opportunities. We surely seem to have “bobbled” the ball with respect to world leadership in ANY arena except militarism. My query is this—-Can we expect to achieve consistent policies with a political system that re-invents itself every 2 and 4 years?  (My first post-go easy on me)

Bill Bowman

Feb. 23, 2012, 9:21 p.m.

The complexity is overwhelming ... To define the forces that will lead to a successful investment strategy will require hours of thoughtful analysis that is beyond the skills of any one person working alone ... I am pleased to be part of this community ... Bill Bowman

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