Napoleon W. Bush

It was never our intention to take up geopolitics merely for cheap entertainment. Instead, a passage from my old friend, Rick Maybury, had caught my imagination.

"This is not a war on terrorism," he wrote, "…what happened on September 11th was not a flash-in-the-pan news story that will soon go away. It was the beginning of a new era that will affect the economy and our investments for the rest of our lives."

Maybe so. Maybe not.

But idling around America’s counterattack – its War Against Terror (WAT) – revealed something that did look like, if not a new era, at least a cyclical peak of some sort: Never before in the history of the world has there been such an imbalance between one country’s military might and that of the rest of the world.

We stumbled around trying to think of a parallel situation. Finding nothing comparable, we nevertheless fell upon an interesting case – France, after the revolution of 1789.

What triggered the connection was a line or two from another old friend – Jack Wheeler, writing in our own Strategic Investment. "We wax nostalgic for the Age of Heroes, when giants like Ronald Reagan and Margaret Thatcher bestrode the world stage in the 1980s," he sighed. "It is starting to dawn on me that George W. Bush is the equal to Ronald Reagan as a genius geopolitician."

Kids need heroes, we remind ourselves. Childhood friends could recite every pitcher’s batting average in the National League. And who among my classmates can forget that day… was it 1958 or ’59… when Ray Claytor stopped a last minute drive by the opposing soft-ball team on Owensville School playground? The kid coming in to score what would have been the winning run never made it. Instead, he ran into Ray – standing over home plate like the Colossus of Rhodes – and bounced. Ray was our hero that day.

But that was a long time ago. Here at the Daily Reckoning, we still like our heroes. But we know that just as every dog has his day, every fool has a moment of glory. And it’s a rare hero who doesn’t also make a complete mess of things when he gets a chance.

The fall of Louis XVI brought a new era to Europe. France’s aristocrats fled for their lives – agitating Europe’s remaining monarchs to intervene in France and restore them to their positions and property. The excitation reached a fever after the revolutionaries chopped off the heads of Louis and his Austrian wife, Marie Antoinette. All over Europe – but especially in Vienna – aristocrats felt for their own necks… and decided to take action.

The wars went badly for the French. Like the Russian army a century and a half later, the French had arrested or exiled many of their officers. The army was poorly led and badly supplied.

But Revolutionary France had advantages which you will appreciate, dear reader. GDP growth in France during the 18th century was perhaps the strongest in the world. Though France had begun the century trailing England, it ended it ahead.

What’s more, France’s population was exploding. Higher production helped feed more little Jean Louis and Marie- Helenes. Soon, the country was crawling with them.

But France had another hidden advantage: She was the first country in Europe to take full advantage of the delusion known as popular democracy. Who would be willing to die for a monarch? How much of your revenue would you have surrendered to a Louis… a Henry or a Franz Ferdinand?

Franz II, emperor of Austria, was also Marie Antoinette’s nephew. His armies were pros. They were kept in the field by money and threats of force. But that was the style of the times – until the revolution. The French revolution, like the American one that preceded it, turned subjects into citizens. and then took advantage of them as never before.

In 1793, France’s enemies were advancing on all fronts. But a national ‘levee en masse’ called les citoyens to battle. These new recruits weren’t very good soldiers. But there were a lot of them. And they were not fighting for money – but to protect the homeland!

A few years later, a 26-year-old Corsican artillery commander – Napoleon Bonaparte – took charge of the Italian campaign. In a few months of hard fighting, he proved he had a genius for war and became a popular hero throughout France. There were no approval ratings at the time, but had there been polls, Napoleon would surely have ranked near the top for the next 19 years.

In a series of wars and battles, alliances and misalliances, Napoleon’s big battalions gradually brought the rest of Europe to heel. By 1812, all of the continent, save Russia and Great Britain, were at his feet. France was enjoying a boom. It was Europe’s biggest country, boasted the continent’s most powerful army, and its new form of government was proving far more efficient at squeezing blood out of its population of turnips.

At this point, nothing could stop Napoleon. So, everything did.

Napoleon had installed his brother as King of Spain. But the Spanish resisted – beginning a war of terror against French troops. Then, Napoleon attacked Russia. Only a man with a genius for war would have done such a remarkably imbecilic thing. An ordinary man’s ambitions would have been checked long before.

Arriving in Moscow, Napoleon’s troops made an unpleasant discovery. The Russian army had begun a campaign of terror. The city was on fire; there was nowhere to lodge French soldiers for the winter and nothing to feed them. The Grande Armee of the Republic retreated, harassed at every step by the weather – which turned unseasonably cold unseasonably fast – and by Russian terrorists. Only a few of his soldiers made it out of Russia alive.

"The Berezina River crossing," James Burbeck describes the retreat from Moscow, "… was a catastrophe, killing half of the remaining 60,000 troops. Half of those 30,000 survivors died in the following week as temperatures plunged. By the time a few thousand remaining men abandoned their wagons and artillery at the base of an icy hill west of Vilna, the army ceased to be. Survivors of the various contingents simply deserted and walked home or wandered to the closest friendly depots."

Soon, France’s many enemies were attacking from all sides. Napoleon, the Hero of Italy, was defeated… and France was occupied by foreign troops.

More on Thursday… about the economy that is "too big to succeed."

Your editor,

Bill Bonner
March 19, 2002 — Paris, France

So, what’s new?

Gold rose $2.60. Oil is above $25 for the first time in 6 months. And "Bush Abandon’s Strong Dollar," says a headline at Goldenbar.com.

Few Americans chew their fingernails worrying about the dollar. But America’s consumer economy depends on it. Consumers have only been able to continue spending because foreigners have been willing to accept their dollars as if they were worth something. Stocks are only as high as they are because foreign investors are willing to put their money into dollar-based assets.

But there is a cost. The high dollar makes it hard for U.S. manufacturers to sell their products abroad. That’s part of the reason that U.S. automakers, for example, have lost world market share over the last 10 years… and why the recession-that-nobody-notices dropped manufacturing output for 19 months before finally bottoming out.

A fall in the dollar would be devastating for the U.S. bubble economy – raising prices on imports, and driving capital out of U.S. markets. Stocks would fall. Interest rates would rise, consumers would cut back spending and the real recession would, finally, be at hand.

Of course, the worse thing about a fall in the dollar would be that it would be tough for Americans living abroad – such as your correspondent. A bottle of table wine, for which I might spend as little as $3 today, might cost me $5 or $6. The horrors!

Over to you Eric…

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Eric Fry on Wall Street…

– I don’t want to tread too heavily on your geo-political turf, Bill. After all, I am the "market guy," not the gentleman-philosopher. Even so, we market guys occasionally stumble upon a gentlemanly philosophical thought or two. Yesterday, you aptly described the drawbacks of our war on terrorism. Today, I propose a partial solution… But more about that in a moment.

– On Wall Street, investors are making love, not war. The equity love-in features more feel-good vibes than the 1967 "Summer of Love" in San Francisco. And if anyone on Wall Street were toting an M-16, you can be sure that flowers would be sprouting from its barrel.

– The Dow, which has floated nearly 1,000 points higher since early February, eased 29 points yesterday to 10,577. Meanwhile, the Nasdaq gained half a percent to 1,877.

– A couple of Wall Street economists helped to spread the love yesterday by predicting the economy would grow more than 5% in the first quarter. (Hey man, even nerds can be cool sometimes).

– Merrill Lynch’s chief economist, Bruce Steinberg now expects GDP to grow better than a 5% annualized rate during the first quarter. Likewise, Salomon Smith Barney economist, Robert DiClemente, boosted his GDP forecast for the quarter to 5.2%.

– Interestingly, both economists credit rising inventories for boosting their "growth" projections. In other words, merely re-stocking the shelves is considered growth by the government bean-counters. In the real world of course, the "de-stocking" of shelves cause by selling goods profitably is the only stocking that matters.

– It remains to be seen whether profitable de-stocking will follow the current re-stocking. If not, the economy will likely slip back into recession.

– Nevertheless, Stephen Roach, the habitually bearish economist and ardent advocate of the W-recovery scenario is conceding defeat… for now.

– "How could I be so stupid?" the Morgan Stanley economist berates himself for underestimating the strength of the U.S. economy. While not abandoning his forecast of a double-dip recession, Roach now thinks the second leg will arrive later than he originally thought and will begin at a higher level of activity. In his "bout of self-flagellation," the economist owns up to forgetting the "four most important words in modern-day financial market history – don’t fight the Fed."

– "But, obviously the man isn’t fully convinced of the error of his ways," observes Apogee Research, "because he’s sticking to the same story: the overextended consumer sector will probably see a reversal of the refinancing and energy price breaks it’s enjoyed in recent months. On top of all that, a few more years of U.S.-led global growth could take America’s balance of payments toward 7% or 8% of GDP. ‘History is utterly devoid of examples when such a massive external imbalance did not trigger a realignment in relative growth rates and/or a sharp currency depreciation,’ says Roach.

– Now, back to geo-politics…

– "Most people are neither with America nor against it," Bill wrote yesterday. "Instead, they just want to be left alone. The more military force the U.S. throws around… the more people come to detest it. As greater efforts are used to strike down ‘terrorists,’ the more terrorists are created. And the WAT, as Doug Casey points out, risks becoming the ‘Forever War’ – un- winnable, expensive and absurd."

– Maybe we should be dropping butter instead of bombs on our amorphous terrorist enemies. Butter costs much less and does not detonate upon impact.

– The odds that our escalating "war on terrorism" produces a favorable outcome are probably no better than a coin toss. Furthermore, the list of PROBABLE outcomes ranges from counterproductive to woefully destructive.

– Without a clear and identifiable enemy, the war on terrorism seems destined to blow up in our geo-political faces. Whether our "ordnance" explodes amidst intended targets such as combatants or amidst the unfortunate souls who comprise the "collateral damage" category, the outcome of our military efforts will be approximately identical: We will destroy goodwill and sow a bumper crop of hatred toward America.

– Would we be any worse off by dropping butter instead of bombs on those we perceive as terrorist threats? Probably not. On the other hand, would we be hated any less for feeding our enemies rather than killing them? Again, the answer is probably not.

– But that is the point: Neither random acts of violence nor random acts of mercy are likely to advance any national security agenda in the war on terrorism.

– All that we can know for certain is that fewer hapless foreign peasants would die if sticks of butter fell on their heads than if bombs landed on their villages.

– At the margin, the vast populations of terrorists-to-be scattered around the globe might hate us a little less. Also at the margin, a few thousand people might not starve to death, at least not right away.

– Maybe we should keep our B-1s in the hangar until we know exactly who and where the enemy is. Then again, maybe we should be bombing everyone. What do I know? The only "smart bombs" and "Daisy-cutters" with which I have any familiarity are the financial variety that sometimes blow apart investment portfolios. Back to you, Bill.

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Back in Paris…

*** Argentina’s GDP is expected to fall by 13% in the first quarter of this year.

*** In North America, by contrast, rarely has there been a winter so agreeable. Not only was the ‘recession’ so soft that people scarcely noticed… the weather cooperated too, with the warmest temperatures in 106 years. The balmy warm days helped keep oil tanks filled while clear skies allowed builders to keep on driving nails without the normal seasonal delays. But if the weather was accommodating, the Dept. of Labor was even more so. Heedless of wind or weather – the crunchers applied their normal seasonal adjustments. Thus, "one of the warmest Januarys in the record books, coupled with some of the lowest mortgages rates in a generation," writes James Grant, produced "a brilliant report on sales of single-family homes, up 16.2% from December to January on a seasonally adjusted basis." Before seasonal adjustment, sales had fallen 16.8%.