Today marks the first of a new series of special editions of "Outside the Box" that will feature the work of my good friends at Stratfor and be released every other Thursday. With the war in Iraq, geopolitical controversy over oil dependency, and an ever increasing merging towards a global economy, I feel it timelier than ever to stay up-to-date on the geopolitical landscape as it can have broad implications for both investment and political decision making. Contrary to many of the conflicting assessments by politically motivated pundits, each with their own agendas, that are put forth as "analysis," Stratfor is a reality based in-depth and logical intelligence service. As I have said in the past, Stratfor is my main and favorite source for geo-political news and analysis. They have often been referred to in the mainstream press as a 'private CIA,' but I would say in Stratfor's defense that they seem to be more right than their government counterpart.
George Friedman, President of Stratfor, has written an uncomfortable yet nonetheless important piece on America's vulnerability to North Korea and other foreign countries aside from Iraq. He discusses how the outcome in Iraq was much different than expected and how the repercussions will unfold into the future. As I mentioned, it is not a "feel good" article for U.S. citizens, however it is always important to embrace the cold, hard facts for effective decision making and successful investing.
You can click here to subscribe to Stratfor's Daily services at a 50% discount. I have arranged for those subscribing today to get their new 25 page quarterly predictions and analysis report, where they analyze each region of the world, highlighting specific countries where there are potential problems. It is a must read for me. I think you will find it quite useful.
I hope that you will enjoy this addition to the "Outside the Box" family and gain insight into how today's politics are shaping the future of the global economy.
John Mauldin, Editor
Outside the Box
U.S. Vulnerability and Windows of Opportunity
In last week's Geopolitical Intelligence Report, we discussed the way in which the United States has opened up a window of opportunity for other powers. Iraq and Afghanistan have absorbed a large percentage of U.S. ground combat capability, limiting U.S. military options elsewhere. An internal political crisis has further limited the Bush administration's options. With the outcome of the November midterm elections uncertain, outside powers have a window of opportunity in which to take risks.
This week, the North Koreans took advantage of that window of opportunity. At this moment, it is not clear what Pyongyang actually has achieved: We do not know whether the apparent test of a nuclear device went as planned, was a fizzle or was a ruse carried out with conventional explosives. For the sake of this analysis, however, it does not matter. What matters is that the Democratic People's Republic of Korea decided this was the perfect time to jerk Washington's chain. In Pyongyang's view, the risks were small. The geography of the region precludes a U.S. nuclear strike, even if Washington were so inclined. A conventional airstrike (http://www.stratfor.com/products/premium/read_article.php?id=277428) potentially could prompt North Korea to open massive artillery fire on Seoul, just past the border -- and the United States has drawn down its ground forces in South Korea in order to reinforce troops in Iraq. Moreover, the administration has been too preoccupied with other regions and internal politics to frame an effective response.
We recently have seen a similar dynamic involving Russia and Georgia, a U.S. ally: A dustup over espionage allegations (http://www.stratfor.com/products/premium/read_article.php?id=276867) prompted Russia to blockade Georgia's air, rail, sea and postal services. How the affair started and who started it is less clear than the fact that the Russians have responded with a general disregard to American views on the subject. Quite the contrary: The fact that the Americans do have views on the subject has increased Russian intensity on the matter. The Russians do not fear U.S. responses. The United States needs the possibility of Russian backing on issues involving North Korea and Iran. If the Russians do lend assistance -- which is unlikely -- they certainly will not do so while the United States is intruding into what they regard as their sphere of influence. However slim the chance of real Russian collaboration might be, the United States can't afford to provoke Moscow. The Russians are not concerned about U.S. responses to their behavior; they see themselves as having a degree of freedom of action that they lacked when the United States was in a stronger position.
For the United States, the crucial problem is that this freedom of action -- for the Russians and others -- could be indefinitely extended. Assume, for instance, that the Democrats win both houses of Congress in November. Using budgetary powers, they could reshape U.S. policies and take them beyond the White House's control. And if the Democrats win only one chamber, they could block White House initiatives and throw the government into gridlock, leaving foreign powers with a two-year window of opportunity to press their own agendas.
While there is clearly a domestic political problem, the heart of the matter is military. Regardless of the political constellation in Washington, the military reality on the ground in Iraq severely constrains U.S. options around the world. That, in turn, constrains U.S. diplomacy. Diplomacy without even the distant possibility of military action is impotent. North Korea is a perfect example of what multilateral diplomacy without a unilateral military option looks like: The United States has recruited Russia, China, Japan and South Korea for diplomatic initiatives with North Korea as it partnered with Russia and European powers for dealings with Iran. Since the interests of these powers diverge, the possibility of concerted action, even on sanctions, simply does not exist. Since the possibility of unilateral action by the United States also does not exist, neither North Korea nor Iran need take the diplomatic initiatives seriously. And they don't.
The center of gravity in the American strategic problem is the need to rebuild the country's military option, particularly its ground combat capability. The decline in this area is the frame around the window of opportunity. In order to rebuild its military option, the United States must address the problem of Iraq, along with the secondary issue of Afghanistan. The Americans either must dramatically increase the capability of the U.S. Army and Marine Corps or else decrease their commitment in Iraq. If the United States does neither, its ability to control and influence events in other regions will decline, even if the internal political crisis is resolved. If that crisis is not resolved -- and Iraq continues to soak up resources -- the outcome will be strategic gridlock for the United States.
The Shape of the Problem
The Army is the heart of the matter. Today's U.S. Army was designed in the 1990s, on the assumption that the need for extended combat operations was a thing of the past. Not only was the Army reduced in size, but many of the key components of combat divisions and critical specialties, such as civil affairs, were shifted to the Army Reserve and National Guard. The administration's expectation for Iraq was that there would be a buildup of forces for several months, a short, intense period of combat operations, then a drawdown in forces in a pacified country. The 1990s force was designed just for these kinds of conflicts. The Reserve and National Guard components were mobilized to join and backfill for units deploying to the combat zone. By the end of the year, it was expected, the force would return to peacetime operations.
Iraq didn't work out that way. The drawdown never took place because major combat operations were followed by a major insurgency. The expectation of the administration was that the insurgency would be dealt with in a reasonable time, so the Army was not reconfigured for extended warfare. At any point, proposals for dealing with the fundamental problem -- that the force was too small -- were rejected, with the thinking that there was no need for a significant overhaul to deal with a problem that would be under control in a matter of months. This expectation turned into hope, and the hope into dogma. Thus, the 1990s Army continued to fight a multi-year insurgency with a multidivisional force, while also fighting a second war in Afghanistan and having to stand by for the unexpected.
Having learned from Vietnam that constantly rotating individuals into units for one-year tours undermines unit cohesion, the Army shifted to rotating entire divisions into and out of Iraq after roughly one year. Had the conflict ended in two years, that might have worked. But it now has been more than three years and divisions are doing their second tours, mobilizing Reserve and National Guard units as they go. Consider this example: The 1st Cavalry Division is now deploying on its second tour to take control of the Baghdad region from the 4th Infantry Division. For the coming year, the 1st Cav is going to be locked down in Iraq, but the 4th ID will not be available for operations elsewhere. Upon arriving back in the United States, they will need to rest, repair and integrate new equipment and integrate new recruits to replace veterans leaving the Army. The 4th ID will not be available to deploy anywhere for many months. In effect, for every division in Iraq, one division is being overhauled. Add to this the weakness in the Reserves and National Guard and the phrase "the force is broken" begins to make sense.
In other words, Iraq is eating up U.S. geopolitical options by eating up the Army. This is the first major, extended ground war the United States has fought in a century without dramatically increasing the size of the Army. World War I, World War II, Korea and Vietnam all brought massive increases in military size, mostly through conscription. The Bush administration did not view Iraq as a potentially multi-year, multi-divisional combat operation. It maintained the force roughly as it started, and now that force is broken.
It now is becoming clear that the administration understands this.
Momentum for a Strategy Shift
Two important things happened during the past week. First, Defense Secretary Donald Rumsfeld, long an opponent of expanding the Army's budget, agreed to allow the Army to plead its case for more money to Congress. In the past, Rumsfeld wanted the Army to find more efficient ways to run counterinsurgency operations, relying more on technology than manpower. That's a good idea, and might happen some day, but it didn't happen for this war. It is now obviously pretty late in the game to cut the Army loose for funding -- plus, any new funding it does get won't impact the battlefield for a couple of years at best. But Rumsfeld's move does signal recognition that the basic assumption up to this point was flawed.
More important is the second thing: James Baker, a former secretary of state and a close adviser for both President Bushes, has been chairing a genuinely bipartisan committee called the Iraq Study Group (ISG), which has been conducting a bottom-up review of the war. Over the weekend, Baker spoke to the media, hinting at the parameters of the recommendations the ISG will make once the elections have been held. He made it clear that a precipitous withdrawal from Iraq is impossible, since that would create a massive vacuum in which Iran and Syria would move. At the same time, he made it clear that the country will have to adopt a new strategy.
At the center of the problem is the fact that the United States has been trying to create a coherent government in Baghdad that is made up of hostile and competing parties. The U.S. Army and Marine Corps have been given the assignment of creating a secure environment in which this can be accomplished. To do this, they must suppress the militias and insurgent groups that want to block the political process. The United States has been trying to do this militarily since the summer of 2003. Its forces have failed for a host of reasons -- ranging from the number of troops, the quality of intelligence, the impossibility of engaging combatants while simultaneously protecting noncombatants (who are themselves frequently hostile to U.S. forces), and so on.
So long as the United States continues to regard suppression of militias and insurgents as the precondition for creating a government -- and the creation of such a government remains the strategic goal of the United States -- the Army and Marine Corps will continue to be sucked up by Iraq, and countries like North Korea will be free to maneuver. Therefore, it follows that the ISG either will recommend that the administration abandon its goal of creating a unified government in Iraq or that the establishment of such a government should not depend on the United States creating a secure environment.
In short, we expect the ISG to recommend that the mission of U.S. forces be shifted away from responsibility for day-to-day security, allowing the United States to act instead as a general guarantor of Iraq's independence from Iranian control, and as a block against the expansion of Iranian power in the Arabian Peninsula. This would mean a withdrawal of U.S. forces from populated areas to enclaves that are close to the cities, and to the south and west of the Euphrates River. It has been suggested by some that U.S. forces be based primarily in northern Iraq, but this would depend on Turkey's willingness to allow the force to be supplied through Turkish ports, which is far from certain.
Thus, regardless of the results of the November elections, we expect a change in strategy by the Bush administration. First, there will be a rebuilding of the ground forces. Second, there will have to be a redefinition of U.S. strategy in Iraq so that American goals match capabilities. Third, the U.S. ground capability outside of Iraq will have to be regenerated rapidly so that forces can be available for insertion in unexpected trouble spots -- like the Korean Peninsula -- if needed.
What the United States has learned with North Korea is that, when a window of opportunity opens, other countries quite reasonably step through it. Diplomacy without a realistic threat of significant action, in the event that diplomacy fails, is just empty chatter. Multilateralism without the option for unilateral action leads to paralysis. In other words, the principles the Bush administration has argued for are incompatible with the reality that Iraq has created. If the principles are correct, U.S. strategy in Iraq must shift and the mission must be brought in line with the force.
Your shaking his head and pondering analyst,