Thursday, December 17, 2009

Leveraging "Emerging" Adversaries: Pre-Emptive Strategies

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Leveraging "Emerging" Adversaries: Pre-Emptive Strategies
Written by Douglas Castle (http://aboutdouglascastle,blogspot.com/) and first published in Taking Command! (http://takingcommand.blogspot.com/).

Dear Friends:

Hyper-conservative publishers like Robert Livingston (whose articles I often disagree with, but always enjoy reading -- I read the "lefty liberal" stuff as well as the "right-wing conservative stuff" -- this keeps me "fair and balanced" [ahem]) are increasingly pointing to China's rising prominence in the global economic arena as a threat to the United States and other industrialized western nations. Tagging China as an "enemy" is useless. Viewing China as a prospective "resource" opens up a world of possibilities. Once again, perception proceeds action.

Many supposed "enemies" can be strategically positioned as assets, instead of liabilities, if we remember the following principles:

1.    An adversary can be directed to either distract or attack your other enemies. Let them fight it out while you sit on the sidelines and sip lemonade. This requires simple rumor-mongering and baiting. It is invariably effective because it feeds every sovereign power's paranoia about being defeated, either in economic reality or in international perception. The sin of pride screams out to be used as a manipulative tool, especially when it is founded upon insecurity.

2.     An adversary can become our supplier or our customer through a purely-economically themed strategy. In either case, we can be successful in using greed (another one of those doggoned sins) to manipulate an adversary into working with us if we can demonstrate a direct economic advantage without becoming entrapped in political or philosophical debate. We can create an interdependence, or the semblance of an independence which would cause our adversary to view our commerce as an integral part of its benefits and security. That having been said, we must caution ourselves against letting the other party become a sole source provider or customer...we must quietly hedge our bet by diversifying suppliers and customers. This is crucial. we do not want to be desperately dependent -- we want to appear politely dependent.

3.     Investing in an adversary (financially and/or politically) can help us to own a piece of a possible winner, much like hedging a bet or selling a stock short. Having an adversary invest in us (preferably as an equityholder and not as a creditor in corporate or governmental debt instruments) also defuses an adversary's temptation to attack us...even if this is only in the interest in safeguarding their own portfolios and positions.

If we sense an adversary's rising to prominence, we can either attack them in the earliest stages in their demonstration of intended harm, or, failing that, we can entangle them in one of the three strategies delineated above. If we are completely successful, we may find ourselves with a trading partner instead of a threat of fiscal or physical war.

On this subject, some interesting news follows, with appropriate attribution. The tone of the article and its political implications are interesting and significant. The investment consideration being promoted in the article do not necessarily represent my views. I don't give investment advice. Nowadays, I don't request any either.

In Peace and Prosperity,

Douglas Castle
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China’s Century: The Impending Threat to America and the Dollar

December 16, 2009 by John Myers for PERSONAL LIBERTY DIGEST

“India conquered and dominated China culturally for 20 centuries without ever having to send a single soldier across her border”—Hu Shih, 20th Century scholar.

We are a little more than two weeks away from the second decade of the 21st century. More and more it is beginning to look like China’s century.
It’s been 60 years since the Communists seized power. According to Fareed Zakaria, the host of CNN’s Fareed Zakaria’s GPS, “Mao Zedong dragged the country through a series of catastrophic convulsions that destroyed its economic, technological and intellectual capital.”

But in December 1978 Mao’s successor, Deng Xiaoping, gave his famous cat speech which marked the fulcrum upon which the giant nation turned. At a Communist Party meeting he urged economic development over ideology. “It doesn’t matter if it is a black cat or a white cat,” said Deng. “As long as it can catch mice, it is a good cat.”

The question three decades later is what exactly is the Chinese cat hunting? Is it cooperation with the United States and the continued development of the global economy, or is it the relentless pursuit of global power and resource wealth? All the evidence is not yet in, but what we do know seems to indicate the latter with all its chilling ramifications.

But any discussion of China has to be first and foremost about its incredible economy, for the nation has risen towards superpower status in such little time. It is an economy that has doubled every eight years for the past three decades!
Just consider the following:

China has foreign exchange reserves totaling almost $2.2 trillion, double the next largest holder, Japan.
The number of cars driven in China doubles every three years.
China is the world’s largest producer of coal, steel and cement.
Twenty of the world’s fastest growing cities are all in China.
China manufactures two-thirds of all the world’s photocopiers, microwave ovens, DVD players and shoes.
Starbucks predicts that sometime next year it will have more cafes in China than in the U.S.
China is the world’s second largest defense spender (behind the USA).

It’s the final item that reveals the claws in China’s carefully crafted Panda Bear self-portrait.

A 2006 U.S. Department of Defense assessment of China was chilling. According to that report the Pentagon viewed China as the next big military threat to the U.S. “There are some real concerns about China’s military modernization,” said Adam Segal, senior fellow for China studies at the Council on Foreign Relations.

Then in 2009 a report from the Council on Foreign Relations said that China has been steadily building up its strategic and conventional capabilities since the 1990s.

According to U.S. defense experts, in 1990 China had a “bare-bones” military: basic capabilities, but nothing sophisticated or top-of-the-line. But two decades of double-digit spending increases have completely changed that picture.
The Pentagon estimates China’s total military spending for 2007 to be between $97 billion and $139 billion, as compared to $52 billion reported by China.

According to the Council on Foreign Relations most of that spending has gone to building a sophisticated, modern military: a large, increasingly capable fleet, an air force stocked with Russian warplanes, and technical strides which have improved China’s ballistic missile arsenal, as well as satellite surveillance, radar and interception capabilities.

“(U.S.) Hawks insist that the Chinese are seeking to drive the U.S. military out of the Pacific, and make it Beijing’s lake rather than what it has been for decades, an American pond,” said Time Magazine in an April 2009 issue.
China is constructing a nuclear aircraft carrier with a lethal and global reach to support its growing fleet of technologically advanced nuclear submarines.

Why is Beijing arming itself to the teeth? Perhaps for global dominance. Perhaps just for the natural resources it needs to sustain its growth: Core among them being oil.

This year Asia will have consumed about 50 percent of Middle East exported oil. China understands it might have to count on its military to lock-in future supplies.

That could mean another arms race or worse. That is something the U.S. can ill afford.

Another Golden Empire

China is also arming itself with gold.

According to the China Gold Association, Chinese demand for gold could total more than 16 million ounces this year, up from 12.9 million ounces in 2008.

China has also become the world’s largest gold producer, having surpassed South Africa in 2007.
“China is likely to become the number-one supplier and consumer of gold this year,” said Rozanna Wozniak, investment research manager at the World Gold Council.

On Nov. 31, China’s Economic Information Daily published remarks by a senior Chinese official indicating that Dubai’s debt crisis could be a good opportunity for China to purchase gold and oil assets.
Ji Xiaonan (Chairman of the Supervisory Committee overseeing large state-owned enterprises) was quoted as saying that the Dubai debt crisis "could give China an opportunity to put some of its foreign exchange reserves into gold or oil."
Just two weeks ago Ji Xiaonan said that China should increase the amount of gold it holds in reserves to reduce potential losses from a depreciating dollar. Currently China has relatively small gold reserves, just 1,200 metric tons or about 7 percent of the world total.

But Ji Xiaonan wants to change that. He wants China gold reserves to reach 6,000 metric tons within three-to-five years and possibly to 10,000 metric tons in eight to 10 years. (Ten thousand metric tons represents 350 million ounces of gold or about four years of global gold production.)

Money is Not a Problem

China has a lot of money to invest in gold and other real assets. It has foreign currency holdings of $2 trillion which include $800 billion in U.S. Treasury debt. With that kind of dollar exposure it is little wonder that China wants to increase its gold reserves 10-fold.
This will be an unprecedented national build-up of official gold reserves (in fact for the past 50 years most nations have been net sellers of gold). China’s radical increase in its bullion reserves is likely a harbinger for much higher prices for the Midas metal. How high is anyone’s guess, but I wouldn’t be surprised to see gold above $1,500 by next spring.

Action to take: Don’t be surprised by a correction in the price of gold going into January. I think that over the very short-term the bull is tired. Over the long-term the bull market in gold is very much alive. I recommend you use any correction to add to your physical gold holdings in anticipation of considerably higher prices in 2010.

Yours for real wealth and good health,
John Myers
Myers’ Energy and Gold Report
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