Turkish Forum

Category: Turkey

  • Israel-Turkey diplomatic spat worsens, despite end of Gaza fighting

    Israel-Turkey diplomatic spat worsens, despite end of Gaza fighting

     

     By Barak Ravid

     

    HAARETZ.COM


    The crisis in relations between Israel and Turkey, which began when the Gaza operation began three weeks ago, is getting worse. A political source in Jerusalem said that the head of the political-security bureau at the Defense Ministry, Amos Gilad, refused to meet with Ahmet Davutoglu, the senior foreign policy adviser to Turkey’s Prime Minister Recep Tayyip Erdogan, while the two were in Cairo last week.

    Last Thursday, Amos Gilad visited Cairo for talks with Egypt’s Omar Suleiman on a cease-fire agreement. At the time, Davutoglu, who had served as a mediator in Israel’s talks with Syria in Istanbul, was in touch with Hamas politburo chief Khaled Meshal, who is based on Damascus.

     

     

    At the start of the Gaza operation, Erdogan instructed Davutoglu to serve as a conduit between Hamas and the West and also try to involve Turkey in the cease-fire negotiations. Egypt expressed its reservations at Turkey’s involvement and refused even to allow Davutoglu to sit in on talks with senior Hamas officials in Cairo.

    But it turns out that not only Egypt refused to have exchanges with Davutoglu. So did Israel. A political source in Jerusalem said that on Thursday, when Gilad was in Cairo, the Turkish ambassador to Egypt called his Israeli counterpart, Shalom Cohen. The Turkish ambassador asked for a meeting between Davutoglu and Gilad to deliver a message from Hamas. The political source said the Turks “asked for even a five-minute meeting” and that the ambassador called back several times.

    The Turkish request was relayed to Gilad by the Israeli ambassador, but he refused to meet with Davutoglu. The Israeli political source said the reason for the refusal was the deterioration in relations between Jerusalem and Ankara, stemming from the unprecedented verbal attacks by Erdogan on Israel.

    The source added that another reason was the unwillingness to allow the Turks to intervene in the cease-fire talks and the wish to rely solely on the Egyptian channel.

    Erdogan’s attacks on Israel in recent weeks have been particularly fierce, with Prime Minister Ehud Olmert specifically targeted for what the Turkish leader called “lying to him and acting behind his back.”

    The words of the leader of the AKP, Turkey’s ruling Islamist party, were a source of anger among Turkey’s military, where there is concern that the rift would undermine the strategic ties with Israel.

  • CONF./CFP- The Turkic World, the Caucasus, and Iran, July 10-12, Yerevan

    CONF./CFP- The Turkic World, the Caucasus, and Iran, July 10-12, Yerevan

    International Conference
    The Turkic World, the Caucasus, and Iran: Civilisational Crossroads of
    Interactions
    July 10-12, 2009
    Yerevan, Armenia
    http://www.armacad.org/civilizationica

    The International Journal Iran and the Caucasus
    (; Brill: Leiden-Boston), the Department of
    Iranian Studies at Yerevan State University, the Makhtumquli Feraqi
    Centre for Turkic Studies at ARYA International University (Yerevan),
    the Association for the Study of Persianate Societies (Armenian
    Branch), in collaboration with the International Society for the Study
    of Iran and the Caucasus (ISSIC;
    http://www.armacad.org/iranocaucasica), Caucasian Centre for Iranian
    Studies (Yerevan), the Armenian-Turkmen Cooperation Centre “Partev”
    (Yerevan), and the Armenian Association for Academic Partnership and
    Support – ARMACAD (http://www.armacad.org/; Yerevan) are organising an
    international conference entitled “The Turkic World, the Caucasus, and
    Iran: Civilisational Crossroads of Interactions”.

    The Conference will be held on July 10-12, 2009.
    Venue: ARYA International University, Yerevan, Armenia.

    The region of civilisational interactions from Central Asia to Eastern
    Europe and from Southern Russia to Iran has been one of the focal
    geographical points in world history. The main cultural, political and
    civilisational players in this domain have been the Iranian and Turkic
    peoples, while the Caucasus and the Transcaucasian region with their
    cultural, ethnographical and linguistic uniqueness have served as a
    connecting link and an arena for wars and peaceful cohabitation.
    Though the main stress of the conference will be on cultures,
    histories (including archaeology, etc.), languages and the literatures
    of this vast area, presentations on modern political and regional
    issues, as well as the human ecology topics are also welcomed. The
    conference seeks to emphasise links between the Turkic world, the
    Caucasus, and Iran.

    Working languages – English and Russian.

    Abstracts (not to exceed 300 words) are to be submitted via the web
    form (http://www.armacad.org/civilizationica/abstracts.php) by
    February 20, 2009.  A brief biography, including contact details, is
    also to be included.

    Once your materials have been submitted, a confirmation letter will be
    returned. If you do not receive a confirmation e-mail within 7 days,
    then we have not received your materials. Only in this case, please
    contact: khachik.gevorgyan@yahoo.co.uk

    A notification of acceptance will be sent by March 30, 2009.

    All whose abstracts are accepted for presentation at the conference
    have to send to the Conference Organising Committee 10 Euros before
    June 10 in order to ensure their participation. This amount of money
    will be reduced from the participation fee.

    Participation Fee:

    The conference participation fee is 70 Euros and a reduced rate of 35
    Euros for postgraduate students. Participants from the Caucasus and
    Central Asia will pay 35 Euros.

    For further information do not hesitate to contact:

    Dr. Khachik Gevorgyan,
    Secretary of the Organising Committee
    khachik.gevorgyan@yahoo.co.uk

    Makhtumquli Feraqi Centre for Turkic Studies,
    Arya International University
    Shahamiryanneri street, 18/2
    Yerevan
    Armenia
    Tel: +374 (10) 44-35-85
    Fax: +374 (10) 44-23-07
    www.arya.am
    Email: arya@arminco.com

    International Organising Committee

    Prof. Dr. Garnik Asatrian (Yerevan)
    Prof. Dr. Uwe Blaesing (Leiden)
    Prof. Dr. Ralph Kautz (Vienna)
    Prof. Dr. Vladimir Livshits (Saint Petersburg)
    Prof. Dr. Levon Zekiyan (Venice)
    Prof. Dr. Said Amir Arjomand (New York)
    Prof. Dr. Murtazali Gadjiev (Makhachkala)
    Prof. Dr. Rovshan Rahmoni (Dushanbe)
    Prof. Dr. George Sanikidze (Tbilisi)
    Dr. Gulnara Aitpaeva (Bishkek)
    Dr. Behrooz Bakhtiari (Tehran)
    Dr. Habib Borjian (New York)
    Dr. Babak Rezvani (Amsterdam)
    Dr. Mher Gyulumian (Yerevan)
    Dr. Mahmoud Joneydi Ja’fari (Tehran)
    Dr. Seyyed Said Jalali (Tehran)
    Dr. Kakajan Janbekov (Ashgabat)
    Dr. Filiz Kiral (Istanbul)
    Dr. Irina Natchkebia (Tbilisi)
    Dr. Vahram Petrosian (Yerevan)
    Dr. Tamerlan Salbiev (Vladikavkaz)
    Dr. Alexander Safarian (Yerevan)

  • Poor Richard’s Report

    Poor Richard’s Report

    Contact John Mauldin
    Print Version

    Volume 5 – Special Edition
    January 22, 2009

    The Next 100 Years
    By George Friedman

    Much of the world is focused on the next 100 days—what Obama is going to do. That’s important. But today in a special Outside the Box from my good friend George Freidman of Stratfor We will look out a bit further George is just about to release his latest book, The Next 100 Years: A Forecast for the 21st Century. (Even pre-release it’s already at #11 on Amazon’s non-fiction bestseller list!) Here’s my quick summary; and to cut to the chase, it’s just fascinating.

    What reads like a geopolitical thriller gives a thought-provoking glimpse into what the world will look like in the coming century. George’s strength is his ability to take geopolitical patterns and use them to forecast future events, sometimes with startling and counterintuitive results.

    For example, he forecasts:

    By the middle of this century, Poland and Turkey will be major international players
    Russia will be a regional power – after emerging from a second cold war
    Space-based solar power will completely change the global energy dynamic
    The border areas between the US and Mexico are going to be in play again, like 150 years ago
    Shrinking labor pools will cause countries to compete for immigrants rather than fighting to keep them out
    I confess when George first told me about these ideas, I raised an eyebrow. But after reading the book, and going through the analysis, I find myself sometimes nodding in agreement and other times not being sure what I was reading. But like all the analysis reviews I do, I pay as much attention to the methods, the logic, and the arguments as the conclusions. Do that, and what seems hard to believe all of a sudden makes sense.

    Don’t let short-term fears blind you to long term opportunities. George’s company, Stratfor, is my source for this kind of geopolitical analysis on an on-going basis. I’ve included the full introduction to the book below; and I heartily recommend that you click here for a special offer on a Stratfor Membership that includes a copy of George’s upcoming book.

    John Mauldin, Editor
    Outside the Box

    The Next 100 Years

    OVERTURE
    An Introduction to the American Age
    Imagine that you were alive in the summer of 1900, living in London, then the capital of the world. Europe ruled the Eastern Hemisphere. There was hardly a place that, if not ruled directly, was not indirectly controlled from a European capital. Europe was at peace and enjoying unprecedented prosperity. Indeed, European interdependence due to trade and investment was so great that serious people were claiming that war had become impossible—and if not impossible, would end within weeks of beginning—because global financial markets couldn’t withstand the strain. The future seemed fixed: a peaceful, prosperous Europe would rule the world.

    Imagine yourself now in the summer of 1920. Europe had been torn apart by an agonizing war. The continent was in tatters. The Austro-Hungarian, Russian, German, and Ottoman empires were gone and millions had died in a war that lasted for years. The war ended when an American army of a million men intervened—an army that came and then just as quickly left. Communism dominated Russia, but it was not clear that it could survive. Countries that had been on the periphery of European power, like the United States and Japan, suddenly emerged as great powers. But one thing was certain—the peace treaty that had been imposed on Germany guaranteed that it would not soon reemerge.

    Imagine the summer of 1940. Germany had not only reemerged but conquered France and dominated Europe. Communism had survived and the Soviet Union now was allied with Nazi Germany. Great Britain alone stood against Germany, and from the point of view of most reasonable people, the war was over. If there was not to be a thousand-year Reich, then certainly Europe’s fate had been decided for a century. Germany would dominate Europe and inherit its empire.

    Imagine now the summer of 1960. Germany had been crushed in the war, defeated less than five years later. Europe was occupied, split down the middle by the United States and the Soviet Union. The European empires were collapsing, and the United States and Soviet Union were competing over who would be their heir. The United States had the Soviet Union surrounded and, with an overwhelming arsenal of nuclear weapons, could annihilate it in hours. The United States had emerged as the global superpower. It dominated all of the world’s oceans, and with its nuclear force could dictate terms to anyone in the world. Stalemate was the best the Soviets could hope for—unless the Soviets invaded Germany and conquered Europe. That was the war everyone was preparing for. And in the back of everyone’s mind, the Maoist Chinese, seen as fanatical, were the other danger.

    Now imagine the summer of 1980. The United States had been defeated in a seven-year war—not by the Soviet Union, but by communist North Vietnam. The nation was seen, and saw itself, as being in retreat. Expelled from Vietnam, it was then expelled from Iran as well, where the oil fields, which it no longer controlled, seemed about to fall into the hands of the Soviet Union. To contain the Soviet Union, the United States had formed an alliance with Maoist China—the American president and the Chinese chairman holding an amiable meeting in Beijing. Only this alliance seemed able to contain the powerful Soviet Union, which appeared to be surging.

    Imagine now the summer of 2000. The Soviet Union had completely collapsed. China was still communist in name but had become capitalist in practice. NATO had advanced into Eastern Europe and even into the former Soviet Union. The world was prosperous and peaceful. Everyone knew that geopolitical considerations had become secondary to economic considerations, and the only problems were regional ones in basket cases like Haiti or Kosovo.

    Then came September 11, 2001, and the world turned on its head again. At a certain level, when it comes to the future, the only thing one can be sure of is that common sense will be wrong. There is no magic twenty-year cycle; there is no simplistic force governing this pattern. It is simply that the things that appear to be so permanent and dominant at any given moment in history can change with stunning rapidity. Eras come and go. In international relations, the way the world looks right now is not at all how it will look in twenty years . . . or even less. The fall of the Soviet Union was hard to imagine, and that is exactly the point. Conventional political analysis suffers from a profound failure of imagination. It imagines passing clouds to be permanent and is blind to powerful, long- term shifts taking place in full view of the world.

    If we were at the beginning of the twentieth century, it would be impossible to forecast the particular events I’ve just listed. But there are some things that could have been—and, in fact, were—forecast. For example, it was obvious that Germany, having united in 1871, was a major power in an insecure position (trapped between Russia and France) and wanted to redefine the European and global systems. Most of the conflicts in the first half of the twentieth century were about Germany’s status in Europe. While the times and places of wars couldn’t be forecast, the probability that there would be a war could be and was forecast by many Europeans.

    The harder part of this equation would be forecasting that the wars would be so devastating and that after the first and second world wars were over, Europe would lose its empire. But there were those, particularly after the invention of dynamite, who predicted that war would now be catastrophic. If the forecasting on technology had been combined with the forecasting on geopolitics, the shattering of Europe might well have been predicted. Certainly the rise of the United States and Russia was predicted in the nineteenth century. Both Alexis de Tocqueville and Friedrich Nietzsche forecast the preeminence of these two countries. So, standing at the beginning of the twentieth century, it would have been possible to forecast its general outlines, with discipline and some luck.

    The Twenty-First Century
    Standing at the beginning of the twenty-first century, we need to identify the single pivotal event for this century, the equivalent of German unification for the twentieth century. After the debris of the European empire is cleared away, as well as what’s left of the Soviet Union, one power remains standing and overwhelmingly powerful. That power is the United States. Certainly, as is usually the case, the United States currently appears to be making a mess of things around the world. But it’s important not to be confused by the passing chaos. The United States is economically, militarily, and politically the most powerful country in the world, and there is no real challenger to that power. Like the Spanish-American War, a hundred years from now the war between the United States and the radical Islamists will be little remembered regardless of the prevailing sentiment of this time.

    Ever since the Civil War, the United States has been on an extraordinary economic surge. It has turned from a marginal developing nation into an economy bigger than the next four countries combined. Militarily, it has gone from being an insignificant force to dominating the globe. Politically, the United States touches virtually everything, sometimes intentionally and sometimes simply because of its presence. As you read this book, it will seem that it is America- centric, written from an American point of view. That may be true, but the argument I’m making is that the world does, in fact, pivot around the United States.

    This is not only due to American power. It also has to do with a fundamental shift in the way the world works. For the past five hundred years, Europe was the center of the international system, its empires creating a single global system for the first time in human history. The main highway to Europe was the North Atlantic. Whoever controlled the North Atlantic controlled access to Europe—and Europe’s access to the world. The basic geography of global politics was locked into place.

    Then, in the early 1980s, something remarkable happened. For the first time in history, transpacific trade equaled transatlantic trade. With Europe reduced to a collection of secondary powers after World War II, and the shift in trade patterns, the North Atlantic was no longer the single key to anything. Now whatever country controlled both the North Atlantic and the Pacific could control, if it wished, the world’s trading system, and therefore the global economy. In the twenty-first century, any nation located on both oceans has a tremendous advantage.

    Given the cost of building naval power and the huge cost of deploying it around the world, the power native to both oceans became the preeminent actor in the international system for the same reason that Britain dominated the nineteenth century: it lived on the sea it had to control. In this way, North America has replaced Europe as the center of gravity in the world, and whoever dominates North America is virtually assured of being the dominant global power. For the twenty-first century at least, that will be the United States.

    The inherent power of the United States coupled with its geographic position makes the United States the pivotal actor of the twenty-first century. That certainly doesn’t make it loved. On the contrary, its power makes it feared. The history of the twenty-first century, therefore, particularly the first half, will revolve around two opposing struggles. One will be secondary powers forming coalitions to try to contain and control the United States. The second will be the United States acting preemptively to prevent an effective coalition from forming.

    If we view the beginning of the twenty-first century as the dawn of the American Age (superseding the European Age), we see that it began with a group of Muslims seeking to re- create the Caliphate—the great Islamic empire that once ran from the Atlantic to the Pacific. Inevitably, they had to strike at the United States in an attempt to draw the world’s primary power into war, trying to demonstrate its weakness in order to trigger an Islamic uprising. The United States responded by invading the Islamic world. But its goal wasn’t victory. It wasn’t even clear what victory would mean. Its goal was simply to disrupt the Islamic world and set it against itself, so that an Islamic empire could not emerge.

    The United States doesn’t need to win wars. It needs to simply disrupt things so the other side can’t build up sufficient strength to challenge it. On one level, the twenty-first century will see a series of confrontations involving lesser powers trying to build coalitions to control American behavior and the United States’ mounting military operations to disrupt them. The twenty-first century will see even more war than the twentieth century, but the wars will be much less catastrophic, because of both technological changes and the nature of the geopolitical challenge.

    As we’ve seen, the changes that lead to the next era are always shockingly unexpected, and the first twenty years of this new century will be no exception. The U.S.–Islamist war is already ending and the next conflict is in sight. Russia is re-creating its old sphere of influence, and that sphere of influence will inevitably challenge the United States. The Russians will be moving westward on the great northern European plain. As Russia reconstructs its power, it will encounter the U.S.-dominated NATO in the three Baltic countries—Estonia, Latvia, and Lithuania—as well as in Poland. There will be other points of friction in the early twenty-first century, but this new cold war will supply the flash points after the U.S.–Islamist war dies down.

    The Russians can’t avoid trying to reassert power, and the United States can’t avoid trying to resist. But in the end Russia can’t win. Its deep internal problems, massively declining population, and poor infrastructure ultimately make Russia’s long- term survival prospects bleak. And the second cold war, less frightening and much less global than the first, will end as the first did, with the collapse of Russia.

    There are many who predict that China is the next challenger to the United States, not Russia. I don’t agree with that view for three reasons. First, when you look at a map of China closely, you see that it is really a very isolated country physically. With Siberia in the north, the Himalayas and jungles to the south, and most of China’s population in the eastern part of the country, the Chinese aren’t going to easily expand. Second, China has not been a major naval power for centuries, and building a navy requires a long time not only to build ships but to create well-trained and experienced sailors.

    Third, there is a deeper reason for not worrying about China. China is inherently unstable. Whenever it opens its borders to the outside world, the coastal region becomes prosperous, but the vast majority of Chinese in the interior remain impoverished. This leads to tension, conflict, and instability. It also leads to economic decisions made for political reasons, resulting in inefficiency and corruption. This is not the first time that China has opened itself to foreign trade, and it will not be the last time that it becomes unstable as a result. Nor will it be the last time that a figure like Mao emerges to close the country off from the outside, equalize the wealth—or poverty—and begin the cycle anew. There are some who believe that the trends of the last thirty years will continue indefinitely. I believe the Chinese cycle will move to its next and inevitable phase in the coming decade. Far from being a challenger, China is a country the United States will be trying to bolster and hold together as a counterweight to the Russians. Current Chinese economic dynamism does not translate into long-term success.

    In the middle of the century, other powers will emerge, countries that aren’t thought of as great powers today, but that I expect will become more powerful and assertive over the next few decades. Three stand out in particular. The first is Japan. It’s the second- largest economy in the world and the most vulnerable, being highly dependent on the importation of raw materials, since it has almost none of its own. With a history of militarism, Japan will not remain the marginal pacifistic power it has been. It cannot. Its own deep population problems and abhorrence of large- scale immigration will force it to look for new workers in other countries. Japan’s vulnerabilities, which I’ve written about in the past and which the Japanese have managed better than I’ve expected up until this point, in the end will force a shift in policy.

    Then there is Turkey, currently the seventeenth-largest economy in the world. Historically, when a major Islamic empire has emerged, it has been dominated by the Turks. The Ottomans collapsed at the end of World War I, leaving modern Turkey in its wake. But Turkey is a stable platform in the midst of chaos. The Balkans, the Caucasus, and the Arab world to the south are all unstable. As Turkey’s power grows—and its economy and military are already the most powerful in the region—so will Turkish influence.

    Finally there is Poland. Poland hasn’t been a great power since the sixteenth century. But it once was—and, I think, will be again. Two factors make this possible. First will be the decline of Germany. Its economy is large and still growing, but it has lost the dynamism it has had for two centuries. In addition, its population is going to fall dramatically in the next fifty years, further undermining its economic power. Second, as the Russians press on the Poles from the east, the Germans won’t have an appetite for a third war with Russia. The United States, however, will back Poland, providing it with massive economic and technical support. Wars—when your country isn’t destroyed—stimulate economic growth, and Poland will become the leading power in a coalition of states facing the Russians.

    Japan, Turkey, and Poland will each be facing a United States even more confident than it was after the second fall of the Soviet Union. That will be an explosive situation. As we will see during the course of this book, the relationships among these four countries will greatly affect the twenty-first century, leading, ultimately, to the next global war. This war will be fought differently from any in history—with weapons that are today in the realm of science fiction. But as I will try to outline, this mid-twenty-first century conflict will grow out of the dynamic forces born in the early part of the new century.

    Tremendous technical advances will come out of this war, as they did out of World War II, and one of them will be especially critical. All sides will be looking for new forms of energy to substitute for hydrocarbons, for many obvious reasons. Solar power is theoretically the most efficient energy source on earth, but solar power requires massive arrays of receivers. Those receivers take up a lot of space on the earth’s surface and have many negative environmental impacts—not to mention being subject to the disruptive cycles of night and day. During the coming global war, however, concepts developed prior to the war for space- based electrical generation, beamed to earth in the form of microwave radiation, will be rapidly translated from prototype to reality. Getting a free ride on the back of military space launch capability, the new energy source will be underwritten in much the same way as the Internet or the railroads were, by government support. And that will kick off a massive economic boom.

    But underlying all of this will be the single most important fact of the twenty-first century: the end of the population explosion. By 2050, advanced industrial countries will be losing population at a dramatic rate. By 2100, even the most underdeveloped countries will have reached birthrates that will stabilize their populations. The entire global system has been built since 1750 on the expectation of continually expanding populations. More workers, more consumers, more soldiers—this was always the expectation. In the twenty-first century, however, that will cease to be true. The entire system of production will shift. The shift will force the world into a greater dependence on technology—particularly robots that will substitute for human labor, and intensified genetic research (not so much for the purpose of extending life but to make people productive longer).

    What will be the more immediate result of a shrinking world population? Quite simply, in the first half of the century, the population bust will create a major labor shortage in advanced industrial countries. Today, developed countries see the problem as keeping immigrants out. Later in the first half of the twenty-first century, the problem will be persuading them to come. Countries will go so far as to pay people to move there. This will include the United States, which will be competing for increasingly scarce immigrants and will be doing everything it can to induce Mexicans to come to the United States—an ironic but inevitable shift.

    These changes will lead to the final crisis of the twenty-first century. Mexico currently is the fifteenth-largest economy in the world. As the Europeans slip out, the Mexicans, like the Turks, will rise in the rankings until by the late twenty-first century they will be one of the major economic powers in the world. During the great migration north encouraged by the United States, the population balance in the old Mexican Cession (that is, the areas of the United States taken from Mexico in the nineteenth century) will shift dramatically until much of the region is predominantly Mexican.

    The social reality will be viewed by the Mexican government simply as rectification of historical defeats. By 2080 I expect there to be a serious confrontation between the United States and an increasingly powerful and assertive Mexico. That confrontation may well have unforeseen consequences for the United States, and will likely not end by 2100.

    Much of what I’ve said here may seem pretty hard to fathom. The idea that the twenty-first century will culminate in a confrontation between Mexico and the United States is certainly hard to imagine in 2009, as is a powerful Turkey or Poland. But go back to the beginning of this chapter, when I described how the world looked at twenty-year intervals during the twentieth century, and you can see what I’m driving at: common sense is the one thing that will certainly be wrong. Obviously, the more granular the description, the less reliable it gets. It is impossible to forecast precise details of a coming century—apart from the fact that I’ll be long dead by then and won’t know what mistakes I made.

    But it’s my contention that it is indeed possible to see the broad outlines of what is going to happen, and to try to give it some definition, however speculative that definition might be. That’s what this book is about.

    Forecasting a Hundred Years Ahead
    Before I delve into any details of global wars, population trends, or technological shifts, it is important that I address my method—that is, precisely how I can forecast what I do. I don’t intend to be taken seriously on the details of the war in 2050 that I forecast. But I do want to be taken seriously in terms of how wars will be fought then, about the centrality of American power, about the likelihood of other countries challenging that power, and about some of the countries I think will—and won’t—challenge that power.

    And doing that takes some justification. The idea of a U.S.–Mexican confrontation and even war will leave most reasonable people dubious, but I would like to demonstrate why and how these assertions can be made. One point I’ve already made is that reasonable people are incapable of anticipating the future. The old New Left slogan “Be Practical, Demand the Impossible” needs to be changed: “Be Practical, Expect the Impossible.” This idea is at the heart of my method. From another, more substantial perspective, this is called geopolitics.

    Geopolitics is not simply a pretentious way of saying “international relations.” It is a method for thinking about the world and forecasting what will happen down the road. Economists talk about an invisible hand, in which the self-interested, short-term activities of people lead to what Adam Smith called “the wealth of nations.” Geopolitics applies the concept of the invisible hand to the behavior of nations and other international actors. The pursuit of short-term self-interest by nations and by their leaders leads, if not to the wealth of nations, then at least to predictable behavior and, therefore, the ability to forecast the shape of the future international system.

    Geopolitics and economics both assume that the players are rational, at least in the sense of knowing their own short-term self-interest. As rational actors, reality provides them with limited choices. It is assumed that, on the whole, people and nations will pursue their self-interest, if not flawlessly, then at least not randomly. Think of a chess game. On the surface, it appears that each player has twenty potential opening moves. In fact, there are many fewer because most of these moves are so bad that they quickly lead to defeat. The better you are at chess, the more clearly you see your options, and the fewer moves there actually are available. The better the player, the more predictable the moves. The grandmaster plays with absolute predictable precision—until that one brilliant, unexpected stroke.

    Nations behave the same way. The millions or hundreds of millions of people who make up a nation are constrained by reality. They generate leaders who would not become leaders if they were irrational. Climbing to the top of millions of people is not something fools often do. Leaders understand their menu of next moves and execute them, if not flawlessly, then at least pretty well. An occasional master will come along with a stunningly unexpected and successful move, but for the most part, the act of governance is simply executing the necessary and logical next step. When politicians run a country’s foreign policy, they operate the same way. If a leader dies and is replaced, another emerges and more likely than not continues what the first one was doing.

    I am not arguing that political leaders are geniuses, scholars, or even gentlemen and ladies. Simply, political leaders know how to be leaders or they wouldn’t have emerged as such. It is the delight of all societies to belittle their political leaders, and leaders surely do make mistakes. But the mistakes they make, when carefully examined, are rarely stupid. More likely, mistakes are forced on them by circumstance. We would all like to believe that we— or our favorite candidate—would never have acted so stupidly. It is rarely true. Geopolitics therefore does not take the individual leader very seriously, any more than economics takes the individual businessman too seriously. Both are players who know how to manage a process but are not free to break the very rigid rules of their professions.

    Politicians are therefore rarely free actors. Their actions are determined by circumstances, and public policy is a response to reality. Within narrow margins, political decisions can matter. But the most brilliant leader of Iceland will never turn it into a world power, while the stupidest leader of Rome at its height could not undermine Rome’s fundamental power. Geopolitics is not about the right and wrong of things, it is not about the virtues or vices of politicians, and it is not about foreign policy debates. Geopolitics is about broad impersonal forces that constrain nations and human beings and compel them to act in certain ways.

    The key to understanding economics is accepting that there are always unintended consequences. Actions people take for their own good reasons have results they don’t envision or intend. The same is true with geopolitics. It is doubtful that the village of Rome, when it started its expansion in the seventh century BC, had a master plan for conquering the Mediterranean world five hundred years later. But the first action its inhabitants took against neighboring villages set in motion a process that was both constrained by reality and filled with unintended consequences. Rome wasn’t planned, and neither did it just happen.

    Geopolitical forecasting, therefore, doesn’t assume that everything is predetermined. It does mean that what people think they are doing, what they hope to achieve, and what the final outcome is are not the same things. Nations and politicians pursue their immediate ends, as constrained by reality as a grandmaster is constrained by the chessboard, the pieces, and the rules. Sometimes they increase the power of the nation. Sometimes they lead the nation to catastrophe. It is rare that the final outcome will be what they initially intended to achieve.

    Geopolitics assumes two things. First, it assumes that humans organize themselves into units larger than families, and that by doing this, they must engage in politics. It also assumes that humans have a natural loyalty to the things they were born into, the people and the places. Loyalty to a tribe, a city, or a nation is natural to people. In our time, national identity matters a great deal. Geopolitics teaches that the relationship between these nations is a vital dimension of human life, and that means that war is ubiquitous. Second, geopolitics assumes that the character of a nation is determined to a great extent by geography, as is the relationship between nations. We use the term geography broadly. It includes the physical characteristics of a location, but it goes beyond that to look at the effects of a place on individuals and communities. In antiquity, the difference between Sparta and Athens was the difference between a landlocked city and a maritime empire. Athens was wealthy and cosmopolitan, while Sparta was poor, provincial, and very tough. A Spartan was very different from an Athenian in both culture and politics.

    If you understand those assumptions, then it is possible to think about large numbers of human beings, linked together through natural human bonds, constrained by geography, acting in certain ways. The United States is the United States and therefore must behave in a certain way. The same goes for Japan or Turkey or Mexico. When you drill down and see the forces that are shaping nations, you can see that the menu from which they choose is limited.

    The twenty-first century will be like all other centuries. There will be wars, there will be poverty, there will be triumphs and defeats. There will be tragedy and good luck. People will go to work, make money, have children, fall in love, and come to hate. That is the one thing that is not cyclical. It is the permanent human condition. But the twenty-first century will be extraordinary in two senses: it will be the beginning of a new age, and it will see a new global power astride the world. That doesn’t happen very often. We are now in an America-centric age. To understand this age, we must understand the United States, not only because it is so powerful but because its culture will permeate the world and define it. Just as French culture and British culture were definitive during their times of power, so American culture, as young and barbaric as it is, will define the way the world thinks and lives. So studying the twenty-first century means studying the United States.

    If there were only one argument I could make about the twenty-first century, it would be that the European Age has ended and that the North American Age has begun, and that North America will be dominated by the United States for the next hundred years. The events of the twenty-first century will pivot around the United States. That doesn’t guarantee that the United States is necessarily a just or moral regime. It certainly does not mean that America has yet developed a mature civilization. It does mean that in many ways the history of the United States will be the history of the twenty-first century.

    John F. Mauldin
    johnmauldin@investorsinsight.com

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  • Nalbandian Confirms Progress In Turkish-Armenian Talks

    Nalbandian Confirms Progress In Turkish-Armenian Talks

     

     

     

     

     

    By Ruben Meloyan

    Echoing statements by his Turkish counterpart, Foreign Minister Eduard Nalbandian said on Wednesday that Armenia and Turkey have come close to normalizing their historically strained relations. He also dismissed Ankara’s warnings that the new U.S. administration will set back the process if it recognizes the 1915 mass killings of Armenians in the Ottoman Empire as genocide.

    The two neighbors embarked on a dramatic rapprochement last year culminating in Turkish President Abdullah Gul’s historic September trip to Yerevan. In a series of follow-up negotiations, Nalbandian and Turkish Foreign Minister Ali Babacan reportedly made further progress towards the establishment of diplomatic relations and the opening of the Turkish-Armenian border.

    “Turkey and Armenia have never been closer to a plan on normalizing relations,” Babacan stated late last week.

    Commenting on this statement, Nalbandian said Yerevan continues to stand for an unconditional normalization of bilateral ties. “Our position is unchanged and we expect the same approach from Turkey,” he told a news conference. “In that case, we are really very close to solving the issue. In that sense, I share Babacan’s view that we are very close to normalizing relations.”

    But he stressed that Ankara should drop its preconditions for diplomatic relations and an open border if the process is to reach a successful conclusion. A resolution of the Nagorno-Karabakh conflict acceptable to Azerbaijan has been one of those preconditions.

    Turkey also wants an end to the decades-long Armenian campaign for international recognition of the 1915 genocide. Babacan warned that U.S. President Barack Obama “will harm the process” if he honors his election campaign pledge to term the Armenian massacres a genocide once in office.

    Nalbandian disagreed with that. “If there is a genuine desire to normalize relations between Turkey and Armenia, then nothing can impede that,” he said.

    The minister also sounded a note of caution about international mediators’ stated hopes to broker a framework agreement on Nagorno-Karabakh in the first half of this year. Matthew Bryza, the U.S. co-chair of the OSCE Minsk Group, told RFE/RL on Tuesday that the mediators “try to have it signed in the beginning of summer.” He said the success of those efforts depends not only on the presidents of Armenia and Azerbaijan but public support in both countries for the proposed basic principles of a Karabakh settlement.

    “The societies will be presented with principles that have been agreed on,” said Nalbandian. “Negotiations are continuing on the basis of the principles proposed by the co-chairs, and there is no agreement between Armenia and Azerbaijan.”

    “If we reach such agreements, we will come to a point where they will be presented to the publics in both Armenia and Karabakh,” he added. “And if there is popular support for them, the leadership will be able to make some decisions. But I wouldn’t set any time frames.”

    https://www.azatutyun.am/a/1599404.html

  • Inaquration of the 44th President of United States

    Inaquration of the 44th President of United States

    On the Inaquration of the 44th President of United States

    This 20th day of January 2009,

    The Turkish Forum “World Turkish Coalition”

    Congratulates

    President Barack Huseyin Obama and his Familiy

    And Celebrates

    the continuation of Long standing “Stratejik Partnership”

    and Friendship of the people of the Unites States and Turkey


    Turkish Forum – Dunya Turkleri Birligi

    2009 yili Ocak Ayinin 20’sinde

    Amerika Birlesik Devletlerinin 44 uncu Baskani Olan

    Sayin Barack Huseyin Obama’yi ve Ailesini tebrik eder

    Ve cok uzun zamandan beri devam etmekde olan

    ABD-Turkiye Stratejik ortakligi ile

    Turk ve Amerikan Toplumlarinin yakin isbirligininin devamini Kutlar<–>

  • The Endgame by John Mauldin

    The Endgame by John Mauldin

    Thoughts from the Frontline Weekly Newsletter

    The Endgame

    by John Mauldin
    January 17, 2009

    In this issue:
    The Endgame
    Employment Numbers Are Worse Than Posted
    Aye, Captain, I’m Giving Her All I’ve Got!
    Problem #1: Deflation
    Problem #2: Pushing on a String
    The Muddle Through Middle
    Conversations With John
    Deflation? Stimulus? Deleveraging? Recession? A soft depression? A return to a bull market? With all that is going on, how does it all end up? When we get to where we are going, where will we be? In chess, the endgame refers to the stage of the game when there are few pieces left on the board. The line between middlegame and endgame is often not clear, and may occur gradually or with the quick exchange of a few pairs of pieces. The endgame, however, tends to have different characteristics from the middlegame, and the players have correspondingly different strategic concerns. And in the current economic endgame, your strategy needs to consist of more than hope for a renewed bull market.

    Rather than looking at just one year, in this week’s letter we take the really long view and ask what the end result or endgame will look like. There are three possible scenarios (and multiple combinations) that I can think of, we will explore each. Any of them could happen, so we will need to look at some signposts to get an idea of what is actually going to occur. I can make the following prediction that will be absolutely correct: Whatever scenario I lay out here, events and time will change what actually happens. But this will give you an insight into my longer-term biases, and that should be useful. As I tell my kids, put on your thinking caps.

    There are a few housekeeping topics I need to cover, but I will do it at the end of the letter. I just did two interviews with Aaron Task and Henry Blodget at Yahoo Tech Ticker, and will provide the links. I also want to talk about the upcoming Strategic Investment Conference, April 2-4 in La Jolla, which is going to sell out. And make sure you get around to subscribing to my new information service, called Conversations with John Mauldin. I will be posting the first conversation very soon, and you don’t want to miss it! So, stay with me and let’s jump right into this week’s letter.

    Employment Numbers Are Worse Than Posted

    First, I have to address some more government data that can be misleading. We were told Thursday that initial unemployment claims were “only” 524,000. The talking heads immediately said that was proof the economy is simply bad, not falling off a cliff. Again, like last week, that seasonally adjusted number masks the real number, which was 952,151. That is not a typo. There were almost 1 million newly unemployed last week! That is up over 400,000 from the same week in 2008, while the seasonally adjusted number was up only 200,000. Last week the real number was 726,000, so this is a material rise of over 225,000, yet the seasonally adjusted number suggests a rise of only 57,000 from last week.

    The continuing claims data leaped over 500,000 to (again, not a typo!) 5,832,746. The length of time people are staying unemployed is also rising rapidly. We are up almost 1.5 million new continuing claims in just the last five weeks. That is a stunning rise of over 30% in unemployment claims in just over a month. The data is truly ugly, but it is what it is.

    When you are in periods where there are deep outliers to the data because of very real turning points in the economy (such as we are going through now), the seasonally adjusted numbers can mask the real underlying trends, both up and down.

    Aye, Captain, I’m Giving Her All I’ve Got!

    Let me repeat a point I made last week, which is important and necessary for us to grasp if we are to understand where we are headed.

    We are in completely uncharted territory in terms of the economic landscape. Like the USS Enterprise in Star Trek, we are boldly going where no man has gone before. But the captains of our fleet are Keynesians to their core (and they don’t have any Vulcan advisors). They don’t have any historical maps to guide us back to a functioning economy; they only have theory. The North Star they are guiding us by, for good or ill, is John Maynard Keynes, with a slight nod to Milton Friedman.

    It is not a question of whether or not there will be massive stimulus. The question is simply how much and for how long. And my wager, as outlined below, is that it will be far larger than anyone would want to admit today. Think of Scotty, aboard the Enterprise, when Captain Kirk demands more power, “But Captain, I’m giving her all she can take. She’s ready to explode!” (But he always finds a little bit more.)

    Let’s set the scene for where we are today. The US likely just experienced a 4th quarter with GDP down over 4%. Some estimates suggest 5%. For all of 2009 we are likely going to be down at least 1-2%, which will make this the longest recession since the Great Depression. Unemployment is headed to at least 9%. Consumer spending will be off by at least 3% this year and again in 2010, as consumers start to find virtue in savings, which should rise in the US to 6% within a few years. Housing prices are going to drop another 10-15%, taking homes back to a level where they may be more affordable.

    Corporate earnings are going to be dismal for at least the first two quarters, with forward estimates being lowered again and again. (For a thorough analysis of earnings, look at the January 2, 2009 issue in the archives.) Global trade is falling rapidly, and it is likely that we will see a global recession this year, which will result in further negative feedback on US, European, and Japanese exports.

    On a more positive note, oil is below $40, which is more of a stimulus to consumers than anything anticipated by the incoming Obama administration (at least as far as consumers go). With short-term rates at zero, adjustable-rate mortgages are actually not the problem anticipated a year ago, and many homeowners are rushing to refinance their homes at lower rates. Large banks have indicated a willingness to actually cut the principle and interest on troubled mortgages, which might lower the number of defaults.

    Conversely, the number of defaults is high and rising — throughout the developed world. It is likely to be 2011 before the housing market finds a real bottom and housing construction can begin to rise.

    The credit markets are still in disarray. While there are some signs that the frozen markets are thawing, the Fed and the US Treasury are having to provide more bailout capital to large US banks. Citigroup is breaking up. Bank of America needs massive amounts of capital to digest Merrill. The hole that is AIG just keeps getting deeper. It is going to take several years for the credit markets to function at anything close to normal, as we simply vaporized a whole credit industry worldwide. To think it will take anything less is simply naive. And in the meantime, the various central banks of the world, along with their governments, are going to step in to fill the need for credit.

    Obama has signaled that he needs the remaining $350 billion of Troubled Asset Relief Program money as soon as possible, although his delegated Treasury Secretary, who will run the program, may be in some trouble, as he failed to pay taxes on his income from his stint at the IMF.

    (This is not an “Oops, I forgot!” The IMF does not withhold income taxes from its employees. However, he was given a memo about the taxes he owed. And he did pay them for two years when he was audited and caught. He clearly knew the nature of the taxes due the two prior years, yet did not come clean on those years. Dumb move for someone on a fast-track career and who clearly has an impressive intellect. He has got to be kicking himself. Since the Treasury Secretary is in charge of the IRS, this is not good for Obama. Someone on his team should have vetted this more thoroughly. I do think Geithner is otherwise as qualified as anyone else on the short list, but this is a very large cloud hanging over him.)

    The auto industry is reeling. Without a lot more government funds, it is unlikely that GM or Chrysler will survive without going through bankruptcy. The industry needs to shed about 20% of capacity. No amount of government funding will change that reality. Beyond autos, industry after industry is on the ropes.

    I could go on and on, but you get the picture that is facing the Obama administration and the entire rest of the developed world.

    So, how do we get out of this mess? As noted above, the captains of our collective ships are Keynesians. They are going to provide as much stimulus as needed.

    Problem #1: Deflation

    We got the Consumer Price Index numbers today, and they tell a tale of deflation. On an annualized basis, the CPI for the last three months was a negative -12.7%! Even core CPI, which is without food and energy, was a minus 0.3%. The CPI for 2008 was just 0.1% for the whole year. This was the smallest calendar-year increase since 1954, and it’s down from 4.1% for 2007. (To see the whole release and data, you can go to www.bls.gov.)

    I outlined the problem of deflation last week in my 2009 Forecast so I will not go into detail, except to note that central bankers are going to fight tooth and nail any tendency for deflation to catch hold in the economic mind of the country. It is simply part of their DNA.

    Obama wants an extra $825 billion in his stimulus package, in addition to the $350 billion in TARP monies. The Fed has started to buy mortgage assets, and that could be $500 billion or more. That is in addition to some $300 billion plus and growing in commercial paper, in addition to bank assets, etc.

    Let me predict right here that this is merely the first installment. The problems described above are very large. It is one thing to make credit cheap and yet another to make consumers either want to borrow more, or be able to convince a lender that borrowers can repay their debts. On the one hand, the government is providing capital to banks and hoping they will lend it, and on the other hand the regulators are telling them to reduce lending and increase their capital. Their commercial mortgages on a mark-to-market basis are imploding. Consumer credit risk is high and rising. What’s a bank to do?

    Let’s add it up. In the US, we have seen massive wealth destruction on personal balance sheets. At the end of the third quarter the losses totalled $5.6 trillion, between housing and stocks. They could be over $10 trillion at the end of the fourth quarter. (Source: Hoisington) The losses will almost certainly top $12 trillion by the middle of the year as housing continues to deteriorate. Pick any country in the developed world or much of the developing world, and it’s the same picture: wealth destruction.

    We have seen at least a trillion dollars of capital on financial companies’ balance sheets disappear; and given the recent spate of bailouts, it is likely to get worse.

    As I have been pounding the table about, a credit crisis and imploding balance sheets, a housing crisis, and a massive earnings shortfall that yields a relentless stock market drop are all independently deflationary. The combined forces are massively so. To think that a mere trillion or so dollars in stimulus will be enough to reflate the US and the world economies is simply not realistic.

    Let me offer a simplistic definition of what I mean by reflation: it’s when the velocity of money stops falling for at least two quarters and the economy emerges from outright recession.

    And much of the proposed stimulus is not really stimulus. Temporary tax cuts, as much as I like them, that are not targeted at getting small businesses recharged (which is where the real growth in jobs will come from) will likely be saved, much in the way that the last stimulus package did little real good for the economy, and simply put us another $177 billion in debt that our kids will have to pay. Helping keep people in their homes when they are already over their heads in debt is not really stimulus, however noble it sounds. Over 50% of mortgages that are reduced and rewritten are delinquent again within 6 months. That does not bode well for future efforts. Better to let the home go at some price to someone who can afford it. Tough love, but realistic.

    Giving money to states to allow them to continue to spend beyond their budgets is not stimulus. And why should Texas pay for a profligate California? We have our own problems. The Robin Hood approach to stimulus programs is nonproductive and only encourages bad budgeting habits.

    What will work? Infrastructure development, although that takes time, and some real thought should be given as to which projects are undertaken, rather than allocating according to which Senator has the most seniority. Spending on defense equipment, which must all have US content (which will be distasteful to the left), is real stimulus. Upgrading technology in a number of areas qualifies, although past experience suggests governments are not good at spending new tech money wisely.

    Spending on green technologies? Creating a million new jobs in clean tech? Get real. How do we go from less than a 100,000 real clean-tech jobs to 1,000,000 in five years, let alone one? And three million new jobs? Really? From where? What government program could do this? In what universe? It makes for nice feel-good talk, but has no bearing on reality.

    Don’t get me wrong. In the midst of the late 1970s malaise, when the gloom was as thick as it is today, the correct answer to the question, “Where will all the new jobs come from?” was “I don’t know, but they will.” And it is still the correct answer. The US free market system is still the most dynamic economy in the world, and I truly believe that we will see new industries spring up, which will be a jobs dynamo. But that will take time. It is not a short-term solution, and by short-term I mean 1-2 years.

    My bet is that in the third quarter, when earnings reports come out and are terrible, unemployment is over 8% and pushing 9%, and there is no evidence of a recovery, that we will see more stimulus from both the Fed and Congress. Count on it.

    The Fed and the Keynesian captains of our economic ship are “all in.” If the current plans do not reflate the economy, they are not going to say, “Well, that is too bad. We did what we could. Now we just have to go ahead and let the US economy catch Japanese disease.” Not a chance. They will up the ante.

    And they will keep trying to “jump start” the economy until it works. Obama told us to expect trillion-dollar deficits for years to come. Give him this: he is being candid and honest.

    The Fed, and I think other central banks, are going to step in and be the buyers of last resort for a whole host of debts, both corporate and consumer. There are those who worry about creating inflation, because they actually do have to print money to buy these debts. While I would prefer a world where a central bank does not intervene in the markets, the time to fix the problem of excess leverage was a decade ago. Allowing banks to go to 30:1 leverage based on “value at risk” models and other financial wizardry that clearly neither the banks nor the regulators understood, was simply bad policy, and we are paying for it. As Woody Brock so wisely notes, 30:1 leverage is not three times more risky than 10:1 leverage, it is 25 times more risky. (Trust me, or at least Woody, on the math.) As an aside, many European banks were even more highly leveraged.

    The End Game

    The US (and indeed soon the whole world) is in a deep recession. The US is going to try and combat that recession with stimulus on a scale never before tried. It is a grand experiment. On the one hand is the theory that you can allocate stimulus and keep the velocity of money from falling. On the other hand is the theory that once the deleveraging process starts, there is not much you can do about it: it is going to work its way through the economy. We are about to find out which theory is correct.

    So, let’s look at three possible outcomes, with the best outcome first. The basic optimistic assumption is that, while this recession is deep and the worst in the post-WWII era, it is still just a recession. Free-market economies eventually recover. Recessions do their work of reducing excess capacity, and the businesses which survive enjoy increased market share and potential for profits to rise. And corporations do indeed have on balance stronger than usual balance sheets going into this recession, except for most financial corporations. Another exception is businesses that were bought by private equity firms with large leverage. Many of those will have to be restructured. And those that have too much leverage or were too aggressive with expansion programs? They will go the way of all overleveraged flesh.

    Besides, the optimistic scenario holds, the massive amount of stimulus being applied to the US economy is on a scale never seen. It will work, just as an easy monetary policy has always worked. (Except in the ’70s, but we won’t make that mistake again! We learned our lesson, yes we did! Volker can stay in retirement.)

    This scenario assumes that the psyche of US consumers has not actually been seared all that much, and that they will return to their spending habits as soon as they are able. It also assumes this is a normal business-cycle recession. There really is no endgame. It is business as usual. There has been no fundamental altering of the US dynamic. Banks will start lending again, businesses and consumers will start borrowing, and things get back to normal. Deflation is just some bugaboo that a weird coterie of economists and investment writers harp on to scare the children into behaving more rationally. It can’t really happen here. And besides, the Fed can print enough money to make deflation go away. The real worry will be if they overshoot and inflation comes roaring back.

    Problem # 2: Pushing on a String

    The economy clearly let leverage run to an irrational level. You’ve seen the graphs. US debt to GDP is now over 300% and has risen precipitously in the last ten and especially the last five years. Leverage and debt fueled the growth of the economy, but debt growth hit a wall and now the deleveraging process is the painful result. This brings us to the worst-case scenario: that all the efforts of the Fed will go for naught and that we are in a liquidity trap.

    A liquidity trap is a situation in monetary economics in which a country’s nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy. In these situations, borrowers prefer to keep assets in short-term cash bank accounts rather than making long-term investments. This makes a recession even more severe, and can contribute to deflation. (Wikipedia)

    And there is no question, at least in my mind, that the economy, if left to its own devices, would fall into a soft deflationary depression, which would take years to climb out of. The contention of those who believe that we are headed for such a state of affairs is that no matter what the Fed does, excesses on the part of consumers and unrestrained government deficit spending is going to create a Perfect Storm. First of deflation and then, because the Fed is going to try to re-inflate the economy by printing money, we will see a resurgence in inflation and a collapse or, at the very least, a serious drop in the value of the dollar. Further, to expect foreign governments to continue to buy depreciating dollars and allow the dollar to continue to be the world’s reserve currency is not realistic. And of course, there are those who think we will eventually see hyperinflation as the Fed is forced to monetize the national deficits, with gold going to $3,000 (or higher!). And Obama, with his talk of trillion-dollar deficits for an extended period, certainly adds fuel to that fire.

    If, and it is a big but possible if, the Fed is indeed pushing on a string, then we are likely to see 15% unemployment, yet another lost decade for the stock market, and a real calamity in the pension, endowment, and insurance worlds, which are planning on 8% long-term portfolio returns to meet their obligations. And while I think it is a possibility we must be mindful of, it is not the most likely scenario.

    The Muddle Through Middle

    Now, we come to the third scenario and — no surprise to long-time readers — the one I think is most likely. I think that after we climb out of recession, we Muddle Through for an extended period of time. Follow my reasoning, and remember that I am often wrong but seldom in doubt! And please allow me some room to speculate. I can guarantee that I have some (or most) of the particulars wrong. But I think I have the general direction we are heading in.

    We are in a serious recession. We have to allow time for both the housing market and the credit markets to heal. This will take at least two years. I think we have permanently seared the psyche of the American consumer. Consumer spending is likely to drop at least 6-7% over the next two years, and maybe more. The combination of all three bubbles (consumer spending, credit, and housing), which were made possible by increasing leverage and poor lending standards, is by definition deflationary. (I know, I keep repeating, but most readers do not really get the rather disturbing implications.)

    The US government in general and the Fed in particular will react to the problem. Most of the government stimulus, other than that used to reliquefy the banking system, build useful infrastructure, and encourage small business to expand, will be wasted or have little short-term effect. The Fed (and central banks around the world), on the other hand, do have the potential to succeed with a “shock and awe” type of stimulus program.

    The problem is the Velocity of Money. (You can see this explained in my December 5, 2008 letter.) There is just no way of knowing when the Fed programs will really create some traction. Anyone who shows you a model that says such and such an amount of stimulus is needed is from the government, trying to tell you that this time we really do know what we’re doing. Any such models are based on assumptions about things we have no way of knowing.

    The Fed (and the US government) are going to continue to run deficits and print money until the economy begins to reflate. That is one thing I truly believe. Will it be a total of $2 trillion? Three? Four? More? I don’t know. How large will the Fed balance sheet be in a few years? I don’t know. And neither does anyone else. There are just too many damn variables.

    But I do believe that at some point there will be some inflationary traction. And combined with an economy resetting itself at some new level of consumer spending, and with a basically resilient US free-market system, a recovery will begin.

    But here’s the problem. Let’s assume, and we can, that we find this new set point for the US economy (see the “Economic Blue Screen of Death“). And that the economy begins to grow, but the Fed has injected a lot of liquidity. Now some of that liquidity is “self-liquidating.” By that I mean, commercial paper is typically 90 days. The Fed simply has to begin to wind down its commercial paper investments, and it takes away some of the liquidity it created. Those mortgages they bought? Each month, as payments are made, a little liquidity is taken back from the economy.

    And if inflation is an issue, they can begin to withdraw that liquidity or raise rates. Of course, that will serve to slow the economy down, but better a slower Muddle Through Economy than a return to the high stagflation of the ’70s.

    That gets us to 2011-12. The economy is growing, albeit slower than anyone would like, but government deficits are still in the trillion-dollar range, as Obama and the Democratic Congress have increased the entitlement programs, locking in big deficits for a long time. High deficits put the dollar under pressure. The demand from voters is to get the deficit under control. However, the Social Security surpluses are beginning to dwindle. And just like in the early ’80s, we have a Social Security crisis. Some combination of higher taxes, reduced benefits for wealthier Americans, later retirement ages, and a different methodology of indexing for inflation will be the order of the day.

    But Social Security is the relatively easy problem. Medicare benefits will be at nose-bleed levels and will swamp the ability of the government to fund it and other government programs. Democrats will never allow the programs to be cut back. And getting the 60-plus Republican senators needed for such cuts is just not likely to happen by 2012-2014.

    The problem will be dealt with by cuts in some government programs, but mostly by tax hikes on the “rich” and increased contributions by participants. Since many of the rich are the very small business people who we need to create jobs, this is going to be very anti-growth, extending the Muddle Through Economy for yet another few years. And if taxes are raised too much in 2010 when the Bush tax cuts go away, then we could see a relapse back into a recession.

    Such an environment of higher taxes and slow growth is not good for corporate earnings. Earnings in the recent years have been at all-time high levels as a percentage of GDP. Earnings as such are mean reverting, and thus are unlikely to rise back to previous levels in terms of percentage of GDP. (Of course, in nominal terms they should rise.) This is going to put a constraint on stock market growth.

    Pension plans, endowments, insurance companies, and individual investors who are counting on 8% long-term compound returns from their stock portfolios are as likely to be disappointed in the next five years as they were in the last ten. The environment I am describing is one of compressing price to earnings ratios, much like the period from 1974 to 1982.

    This environment is going to force the creation of new investment programs and products based on income generation. And that is one of the forces that will bring about a real recovery in the middle of the next decade. Investment capital will be made available to businesses that can generate low double-digit or high single-digit returns, as well as new technologies with the promise to deliver new paths to profits.

    The second major force will be the arrival of new waves of technological change. We will see a biotech revolution beyond our current comprehension. It has the real potential for solving a great deal of the Medicare entitlement program problems. For instance, it is likely we will have a real cure for Alzheimer’s within five years. Since that is as much as 7% of US medical costs, that can create a real cost reduction. The same for heart disease, obesity, cancer, and a host of other medical conditions that will start to be dealt with by a new generation of therapies. That is going to create a new, very real bull market in biotech.

    I expect to see a new generation of wireless broadband that powers whole new industries. And it will not just be green tech, but entirely new forms of energy generation that drive the cost of energy down and, combined with other new technologies, make electric cars practical. And along about the end of the decade, the nanotech world begins to really get into gear.

    And just as the tightly wound, low P/E ratios of the early ’80s gave way to a spring-loaded major bull market as new technologies became the driver for a whole new set of public companies, we could (and should!) see a repeat of that performance. There is a new bull market in our future.

    The problem is getting from where we are today to that next dawn. The definition of insanity is to keep repeating what you have done in the past and expect a different result. We are in a long-term secular bear market. P/E ratios are going to decline over time to low double digits. Hoping that stocks somehow rebound to new highs and that the economy is going to go back to what we saw in 1982-1999 or 2003-2006 is not a strategy. You need to be proactive and take charge of your portfolio, looking for absolute-return types of investments for the next 4-5 years. Simply using a traditional 60-40 split of stocks and bonds is not going to get you to retirement nirvana. It will lead to retirement hell.

    Conversations With John

    As we announced a few weeks ago, I am starting a new subscription-only service. While this letter will always be free, we are going to create a way for you to “listen in” on my conversations with some of my friends, many of whom you will recognize and some who you will want to know after you hear our conversations. Basically, I will call one or two friends each month, and just as we do at dinner or at meetings, we will talk about the issues of the day, with back and forth, give and take, and friendly debate. I think you will find it very enlightening and thought-provoking and a real contribution to your education as an investor. You can still subscribe now, before the actual launch of the service (in a week or so), at the holiday rate of 50% off. I will be having the first conversation next week, and it will include a spirited debate about the topics in this letter. Then, at some point in February, when Nouriel Roubini and I can match our schedules and continents, we will have a conversation you can listen in on as well. This is going to be a very fun project, and you won’t want to miss one chat.

    You will be able to listen online, download to your iPod, or read a transcript. To learn more, just click on , click the Subscribe button, and type in the code “JM33” to get your 50% discount. And read about the bonuses we will offer as well!

    To see my interviews on Yahoo with Aaron Task and Henry Blodget, go to:

    • John Mauldin’s 2009 Outlook: Deflation, Recession, New Market Lows
    • Trillions More: Govt. Will Keep Spending Until Economy Reflates, Mauldin Says

    Along with my partners Altegris Investments, I will be co-hosting our 6th annual Strategic Investment Conference in La Jolla, California, April 2-4. I have invited some of the top economic minds in the country to come and address us, giving us their views on what seems to be a continuing crisis. It will be a mix of economic theory and practical investment advice. Already committed to speak are Martin Barnes, Woody Brock, Dennis Gartman, Louis Gave, George Friedman (of Stratfor), and Paul McCulley. I anticipate adding another stellar name or two. This is as strong a lineup as we have ever had, and on par with any conference I know of anywhere.

    Due to securities regulations, attendance is limited to qualified high-net-worth investors and/or institutional investors. Early registrants will get a discount. Last year we had to close registration, and I anticipate we will run out of room again, so I would not procrastinate. Simply click on the link below, give us your name and email, and you will be sent a form next week to register.

    I should note that most attendees say this conference is the best investment conference they have ever been to. One of the benefits is being with several hundred very nice people in a relaxed setting. We do it up right.

    For whatever reason, this letter has kept me up very late. At 4 AM (!), it is time to hit the send button. For those of you who can actually take a three-day weekend, enjoy it! Alas, Tiffani has me working on a tight schedule as our book deadline looms, although I will slip away tomorrow evening to watch the Mavericks. And hit the gym of course.

    Have a great week! And seriously, there are lots of opportunities in the world today. Just open your mind to some “out of the box” possibilities.

    Your enjoying the ride analyst,

    John Mauldin
    John@FrontLineThoughts.com

    Copyright 2009 John Mauldin. All Rights Reserved

    Note: The generic Accredited Investor E-letters are not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for accredited investors who have registered with Millennium Wave Investments and Altegris Investments at www.accreditedinvestor.ws or directly related websites and have been so registered for no less than 30 days. The Accredited Investor E-Letter is provided on a confidential basis, and subscribers to the Accredited Investor E-Letter are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private investment offerings with other independent firms such as Altegris Investments; Absolute Return Partners, LLP; Pro-Hedge Funds; EFG Capital International Corp; and Plexus Asset Management. Funds recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor’s services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.
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