Israel will Attack Iran Soon

The trend is unstoppable. Israel will attack Iran’s nuclear facilities in a few months. PM Netanyahu and President Obama have finished their ‘talks’ about the Iran issue; but their real positions regarding Iran have not changed.

Hysteria in Israel
Domestically, the Israeli press is whipping up the hype against Iran as an ‘existential threat’ against Israel.  A sober person could say that even if Iran did have a nuclear weapon, it would not be a threat to Israel. An Iranian nuclear weapon launched against Israel, killing thousands, will not only kill lots of Palestinians, it will make Iran an international pariah for a very long time. Despite this, most Israelis believe the threat from Iran is real.

Israeli Foreign Minister Lieberman recently brushed aside Western (especially US) misgivings about their plan to attack Iran. He is probably right in thinking that, for show, the US must publicly disapprove of ‘the plan’, but that it will support Israel in the event of war.

A war with Iran will probably have a limited effect on Israel itself. They do not share a border. Iran’s proxy Hezbollah will be too preoccupied with Syria to attack Israel. For Israelis, war would mean that the US will do most of the fighting, and absorb most of the damage.

Iran Leaders Want War
Iran is probably NOT developing a nuclear bomb. But the threat of a US attack is keeping it from conclusively closing that option. It knows that the US will attack it if it doesn’t have a nuclear bomb. The lesson of Iraq and North Korea is clear: Iraq didn’t have a bomb, it was attacked; North Korea has a bomb, it was not attacked.

So, Iran is now developing a capacity that will allow it to shift to producing a bomb at short notice. Since its access to bomb technology is limited, it may decide to make a bomb anyway by using lower technology and more uranium.

Iran is suffering economically. Soon, international sanctions will bite and cause massive protests against the government. The regime sees war as a possible uniting factor for its people, especially if the war is ‘imposed’ on Iran.

Ironically, economic sanctions make it more attractive militarily to have a war soon. Iran’s military is still quite strong; later, economic problems will sap its strength. Iran reckons that the US will enter the war on Israel’s side, but does not have the resources, nor the political will, to launch an all-out attack. The Iranian government thinks that a war held soon will have a minimal cost.

Iran will continue provoking Israel and the international community. It will make all kinds of destabilizing announcements, war exercises, etc. It will continue hardening potential targets of attack. It will hit Israel targets – mostly outside Israel.

Iran is preparing for war.

Obama Needs a War
The US has informed the Israelis that an attack on Iran now would be ‘ill advised’. This is diplomatic-speak which translates as: “Don’t attack now. Perhaps in the summer.” At the same time, the US says that sanctions need time to work. They are right – sanctions WILL work to stop the nuclear program, but much too slowly for the US.

The US has a big economic problem. It needs the world to concentrate on something other than the problems of the US economy. In 2011, the US hyped up the Euro crisis, exploiting it to the full, even stampeding Americans away from Euro holdings. But the Euro crisis has been solved in 2012. If the US did nothing, the dollar is poised to devalue, and interest rates will soon go up.

So now, the US plans to focus the world on Iran. The US knows that Iran will not do anything to block the Strait of Hormuz – Iran will be harming its own interests if it did so. In a sense, a war with Iran will be a limited one, with some attacks on nuclear installations and the Iranian military. So, the US really thinks that a war with Iran is one which it can afford to wage.

If a war with Iran is timed well, it may have the added advantage of increasing Obama’s chances of reelection.But only is the war is ‘forced’ on the US; a US first-strike will not be received favorably in the US.

Miscalculation
Another reason why a war is inevitable is that the party most likely to start it (Israel) stands to lose the least from this war. The other two parties (Iran and the US) will be the ones really at war. The ‘benefits’ of a war is disproportionately in favor of Israel.

Both the Iranian and US governments see a war as advantageous; but only if they are ‘forced’ into it. They will not do anything to prevent Israel from starting one.

At the same time, both Iran and the US may be underestimating the cost of a war. The Iranians want to unite their country, and maybe even ease sanctions. They would think that a war now will probably lessen chances of a more terrible and damaging war later. They may be wrong. Domestic opposition may still grow, even with a war. Economic sanctions will still bite, pushing people to overthrow the government. Or, the US may extend help to armed opponents of the regime.

The US may also have miscalculated. Even if the Strait of Hormuz doesn’t get blocked, a war will increase world oil prices, maybe even to $200/barrel. High oil prices will severely hurt the US, maybe even triggering a very deep recession.

Bill Against Call Centers?

In the US House of Representatives, there is a pending bill (the U.S. Call Center and Consumer Protection Act) that seeks to discourage companies from transferring their Call Centers abroad. [Bishop Introduces Bipartisan Bill to cut off Taxpayer Dollars for Call Center Outsourcers ] This law, if passed, threatens to lessen the demand for Philippine-based call centers. The proposed bill will penalize US companies outsourcing their call centers by cutting their Federal grants and loans.

No Effect
The proposed bill with probably not pass the US House of Representatives. There is a Republican majority there, which is pro-free trade and  pro-corporation. Outsourcing of call centers is a significant way of reducing operating costs of companies, and thus will be supported by Republicans.

Even if it passes, though, the law’s effect is likely to be minimal. It would be easy for companies to go around it. For one, a lot of US companies already have call centers abroad, or they hire the services of a BPO (Business Process Outsourcing) company. They will not be affected by a ban on ‘transferring’ call centers abroad.

Then, there are some companies which combine an in-house US-based call center with a call center based abroad. The more difficult problems are addressed by the in-house staff, while the routine questions are handled in the Philippines or India.  With this arrangement, a company could conceivably expand its overseas customer service staff without reducing its in-house staff.

Another way of ‘going around’ the law would be to have specialized US-based BPO companies get contracts from US-based companies to handle their customer service work. The BPO company then assigns Third World based personnel to do the Customer Service work.  This means that the BPO company is the one which outsources work abroad, and thus be deprived of Federal grants and loans, but that won’t be a problem for them.

Up the BPO Ladder
Call centers (also called ‘voice BPO services’) are the part of the BPO services which are the target of the protectionists. Right now, this comprises the largest part of the Philippine-based BPO services. There is the impression among many in the US that call centers in India or the Philippines are ‘cheap’ – in the sense of being both low cost and low quality. They do not realize that Philippine-based call centers are perhaps better than US-based ones in terms of quality; due to highly motivated Filipino agents.

But there are other kinds of BPO work, which are growing even faster than call-centers. There is the medical transcription work, which is the transcribing of medical records for US-based doctors. There are back-office operations (accounting etc) for US banks and other financial firms. Back office work is especially lucrative because of the time difference – Phil or Indian workers work on the transactions when it is nighttime in the US. Back-office operations are less language-dependent than call center work, and thus could be done for companies from countries other than the US.

There are also virtual tutors, remote publishing, virtual personal assistants, and a host of other virtual services which could also be provided by Philippine-based BPO companies. Eventually, all kinds of non-voice BPO will become the bigger part of Philippine BPO services.

Cut the Beef
Even though we know that Cong. Bishop’s proposed law will not have much of an effect on Philippine call center services, the Philippines should still express its concern at what is a protectionist act aimed directly at a key Philippine export.  If we do nothing, there could later be other laws that will be more effective.

The Philippines should tell the US that it will consider possible responses to this hostile act, in terms of restricting the entry of some US products to the Philippines in the name of protecting Philippine jobs. Preferably, these would be US service exports of an equivalent value – perhaps something like insurance, advertising or consulting services. We should also consider imposing extra levies on imports such as beef or chicken, or orange juice.

Philippine political leaders are known to be timid in relations with the US, and may not see such moves as ‘proper’. The public should make it clear to the politicians and technocrats in government that such ‘proper’ behavior does not serve the Philippines’ interest. The Philippines should flex its muscles whenever Philippine interests are in possible jeopardy. Otherwise, the US would simply trample on our interests at will.

Americans Inflating Euro Crisis

Americans are aggravating the Euro crisis for their own ends. While there is indeed a problem with the Greek economy, America has made sure that it has developed into a full-fledged Euro crisis.

Euro Crisis?
If the news stories are to be believed, it seems as if the Euro is about to fall apart, and countries will have to revert to their own currencies. This is a myth. In the first place, Greece (and Ireland & Portugal) are small fish compared to the Euro area as a whole, and their problems could not bring the whole currency down. But the main reason why the Euro won’t fail is the strength of the German-France commitment to the Euro. This is something that no American can really understand.

Germany and France see the Euro as the embodiment of their European project, and this means they are committed to it fully. Germany felt the same way about German reunification, and it poured trillions of Euros (then DMs) to make East Germany catch up with West Germany. People were willing to even pay an extra tax just to finance this. The European project is seen by Germans as the thing that ensures the peace and stability of Europe, literally. If the Euro falls, the EU will break up, and a depression and even civil wars may ensue. Germany and France had fought 3 wars with each other, in rapid succession, before the European Community was formed. No sacrifice is too big to prevent this from happening yet another time. There is absolutely no way that the Germans and French will allow the Euro to fail.

Ignorance
America has been doing its best to inflate the Euro crisis. This is due to ignorance, self-interest, and in some cases even malice. Americans are ignorant in that they don’t understand how the EU works. The EU works slowly; but is capable of making huge changes if necessary. EU decision making is a very public affair, with many negotiating positions discussed in the various parliaments and the media. In the end, though, Europe is very pragmatic, and it is actually easier to decide among the 17 members of the Euro-zone, or the 27 EU countries, than it is in the US with its two feuding parties.

In  a sense, the Germans are using the ‘crisis’ for their own ends. The crisis is convenient to force the Greeks to give concessions. But this is part of the public way in which the EU decides on policies. The Germans, and everybody else in the EU, have been using tactics like this since the beginning.

Many Americans, who depend on their 401k funds for their pensions, do not understand the EU dynamics. And they are driven to panic by US  ‘analysts’ and even political leaders who have done their best to inflate the problems with the Euro.

Self Interest
The US government is consciously undermining the Euro in order to stabilize the US Dollar. Because, in the face of the dollar’s instability, to have a stable Euro that could function as a safe haven and even alternative reserve currency would cause a flight away from the dollar. Thus, US government officials are constantly reminding the public (mainly the panicky holders of 401k accounts) that the Euro is in crisis. Obama would say something like: “European countries are as able to repay their debts as America is” – which on face value may pass as some kind of support for the Euro, but which is calculated to remind Americans that investing in the Euro is risky.

Geithner’s supposedly unfortunate comments during the recent EuroFin meeting in Poland (16 & 17 September) is passed as a gaff, but it was perfectly consistent with their policy of overly emphasizing the Euro’s problems. The Euro crisis is just what Washington ordered – as far as they’re concerned, the Eurozone’s crisis should extend at least till after Obama is reelected.

Malice?
There are also those in America who are actively sabotaging the Euro for financial gain. Hedge-fund managers buy CDSs (Credit Default Swaps, financial instruments that ‘insures’ against sovereign default) on bonds from countries such as Spain, Italy or France or sell their bank stocks short. Then they spread rumors that that country’s banks are overexposed to Greek debt.  As a result, the price of the CDS skyrockets and bank stocks fall, and the hedge funds cash in.

Hedge funds have been rightly blamed by European governments for undermining the Euro. Some EU governments have prohibited short selling of bank stocks. The EU and specific countries are investigating the speculation in CDSs. But hedge funds are nimble, and are very difficult to pin down. Hedge funds love doing their dirty techniques against the Euro because they can get away with it. The American public is nervous enough that even small rumors are picked up and could have big effects. Another reason is that hedge funds fear EU investigators much less than US monetary authorities. If they attacked the dollar similarly, they would face far harsher punishment than if the EU catches them.

What Now?
There is now a real Euro crisis, thanks to the Americans. This crisis has depressed the value of the Euro and stock prices. Even though the Euro will not fall, EU governments now have to scramble to control the immediate problems.

While the France-German commitment to the Euro is absolute, this does not mean that they will bankroll Greece forever. They just might opt to have an ‘orderly default’ of Greece, or even kick Greece out of the Euro-zone. After all, Greece didn’t properly qualify to enter the Euro-zone; it had doctored its economic figures to qualify.

But Americans are now being bitten back for their anti-Euro efforts.  Their stock markets (and thus the pensions of millions of Americans) have declined dramatically. International investors and even Central Banks are buying gold at an alarming rate, pushing the gold price ever higher. And the relatively cheap Euro means that the US trade deficit with Europe will only continue to grow. American trashing of the Euro is proving to be only a temporary solution to the US Dollar’s problems. It has led to the US losing precious time that it could have used to decisively address its own problems.

Beyond the Debt Ceiling

The US is in the grip of the political drama around the raising of the debt ceiling. Economists are worried that if politicians fail to come up with a satisfactory solution, the US will go back into recession even if they finally agree on raising the debt ceiling.

Most Americans do not realize that solving the debt ceiling problem isn’t really the main issue. The main issue that they have to face is that the US economy is designed for the wrong century, and that it is long due for a transition to a more ‘modern’  design. Officials try to avoid the inevitable by artificially propping up the economy, but it won’t work. The transition will come. And it will be much more painful than a mere ‘double dip recession’ – it will make the recession of 2008 look like ‘foreplay’.

Transitions are alright in economics – the market will be able to recover and adjust the distribution of goods and services to adapt to any changes in the patterns of use. However, some transitions take long, and this means that the economy will suffer till the transition is over and the market has made the necessary adjustments.

The US is in the midst of three transitions: that of its housing patterns, the use of resources, and the US dollar. And since the nature of all these transitions is that they take a long time, I believe the US “crisis” will last for some time.

The government will naturally act as if it is only a matter of pushing through certain programs, and then the economy will recover. Perhaps certain programs may result in short term growth or increased employment. But this will ultimately be quite futile, and the longer term trends will overpower these gains.

 Housing
The economic crisis was caused by the housing bubble – specifically, the market for ‘sub-prime’ mortgages was oversold.  And this problem continues to this day, with homeowners continuing to default on mortgages. However, this is only part of the problem.  There is a creeping re-concentration of housing patterns in the US. People are not as willing as before to commute two hours or longer to work every day. This is partly due to the economic crisis – if you’re looking for a job, it is better to do so close to home. And, if your house is foreclosed, you would most likely move closer to the city for new and cheaper housing.

But the crisis only aggravates the problem, it did not cause it. Things like demographics (people getting older – and thus wanting to be nearer health care facilities) and the rising price of gasoline/diesel have a longer term effect on housing choices.

The movement of people from sprawling suburbs to smaller urban hubs means that many houses built in the suburbs will go unsold (or not rented) for a long time, and sometimes will only get sold at a very big discount. And the bad effect of this is that people won’t be that eager to buy houses in an area where house prices continue to go down. So, home building companies will lose money or even go bankrupt, until they completely shift their activities nearer urban hubs.

Expensive Resources
With the development of countries such as China and India (and of course, the rest of the world), there will be a squeeze to divide up all the resources needed. The days when Europe and America  could get away with using 80% of the world’s resources are over; and this means that the resources of the world should be shared more equally. And, this means that the price of most resources will go up significantly.

The resource that Americans  will really FEEL going up in price will be that of oil. From the crisis-level price of around $95/barrel, oil will surely go to $150/barrel by 2012. This is on the logic that if the world’s GDP returns to the pre-crisis level, so will the scarcity of oil, and this means that prices will return to pre-crisis levels. And that is only the beginning: beyond 2012, prices will rise even higher. Oil supply volatility may cause temporary peaks or dips in the price, but the overall trend is still for the price to rise.

For the American automobilist, this means that oil will return to highs of $5/gallon, or higher. This will need a permanent adjustment of living patterns. People will need to either commute less, ride trains or buses to work, or use smaller cars or hybrids.  And since oil is used for making things like plastics and fertilizers, the prices for these will also rise, forcing people to change their consumption patterns.

The rise in the price of grain, particularly that of corn, will eventually spell the end of feeding grain to cows.  At a certain point, the number of cows will be limited by the grass that they can eat. See High Corn Price Will Lead to Lower Beef Production Cheap meat will become a thing of the past.

Increased commodity prices will cause a move away from the throw-away economy. There will be a new emphasis on goods that last longer, and use less energy and other inputs.

The “Fall” of the US Dollar
The days of the US dollar as the international reserve currency are soon over. I would say that it would “fall” from this position sometime in this decade. And that the US economy will feel this change quite deeply. (see Two Years After the Fall )

The fall of the dollar finds its roots in the massive debts that the US has – almost 14.3 trillion dollars, to date. The Fed is even tried to stir up US inflation by ‘printing money’, or Quantitative Easing. And to make the problem worse, total US currency abroad totals $75 trillion.  The resulting inflation and the high amount of debt will be the dollar’s undoing; at a certain point, countries will decide NOT to keep dollars as reserve anymore, and NOT to buy up US treasuries, and this will drive up the interest rates on these treasuries.

Already, the rating agencies are threatening to downgrade the rating for US Treasuries from AAA to AA. While this seems like a small step, it will be the first push down the hill for the dollar.

The strength of the US Dollar rests on the willingness of other countries to keep dollars in their foreign currency reserves. Dollars make up to 80% of Central Bank reserves of many countries. Historically, this has meant that the US could buy more from other countries than it sells to them. If Central Banks’ change their mind regarding the desirability of the US dollar as a reserve currency (especially as a result of a change in Treasuries’ ratings), this will result in a sharp drop in the value of the US dollar. And  this point will happen sometime very soon.

After the Transition
After the decade of transition, the US will face a new period of sustained economic growth. The American people’s  flexibility and the country’s huge resources are sure bases for it to build a new prosperity.  Politicians should hurry the transition instead of trying to deny that it will happen.  They should not be distracted by the call to ‘preserve jobs’ or to ‘preserve our way of life’.

Is US Dollar About to Fall?

The US Congress will have to raise the Debt Ceiling from the present $14.3 trillion by August 2, or else the country would face technical default. But the Republicans are demanding budget cuts be done first; and Democrats are demanding that measures should include increased taxes for corporations and the rich. Both sides are standing their ground, and there is a real danger that the country will indeed default by August 2.

Most probably, a deal will be made at the last minute, and the US can go on merrily increasing its national debt for a few more years. But the question remains: can the US dollar’s credibility withstand such a strain? Will the US dollar fall while Congress debates over raising the Debt Ceiling?

I think that sooner or later, within the next 5 years or so, the US dollar is going to “fall”.  The national debt limit is only part of the problem; the main problem is that the US has a triple deficit – of the budget, trade balance, and payments. And that it has accumulated a huge amount of “unbacked liabilities” in the world – to the staggering amount of $75 trillion.

All proposals on the table will help to reduce the budget deficit, but it will even not be enough to get a balanced budget.  Since there will continue to be a deficit in the coming years, the national debt will continue to grow. And then, there is the trade deficit which also grows from year to year. Thus, all plans now being considered will not improve the US’ capacity to repay its debt.

The world is getting impatient with the dollar, and it seems that US politicians are taking their time at solving it, not realizing that the problem is really urgent.

Signs of Trouble
The problems in the Middle East are all in the news. But the biggest problem with it lies not in Libya or even Yemen – but in the fact that the US dollar has not strengthened in the face of all these problems. Almost always before, when there is political turmoil somewhere, the US dollar gains in value, as money exits that country and goes to the safety of the US dollar. Now, the whole Middle East is ablaze, and the dollar, instead of strengthening, has weakened considerably.

Another sign of impending trouble is that the US, even with “QE2” (the program of the Fed for creating $ 600 B by buying government treasuries) and the extremely low Fed interest rate, faces rising commercial interest rates. QE2 was instituted in the first place to REDUCE interest rates. What will happen after June, when the QE2 program is over? Will interest rates rise substantially, resulting in a rise in unemployment? Will there be a double dip recession? If the Fed makes a “QE3” program instead, will this be enough to hold interest rates down? or will foreign fund managers dump US treasuries instead?

A third sign of trouble is the news that PIMCO, the world’s biggest holder of bonds, has entirely stepped out of US Treasuries. Even worse, PIMCO has resorted to selling US Treasuries short – which means that it even has negative ownership of Treasuries. This shows that US Treasuries are no longer attractive to the wiser international investors. I doubt that many hedge funds keep Treasuries in their portfolios either.

A fourth sign is that when Osama bin Laden was killed, he had with him 500 Euros. He had Euros, not US Dollars, which means that he considered Euros more useful in case he had to escape capture in Pakistan – Euros seem to be more useful in bribes etc. in Pakistan. This shows that even in the underworld, the US dollar is not considered a good currency anymore.

Roots of Crisis
The present crisis has its roots way back in the Bretton Woods agreement, made after the Second World War, to have the US dollar as the world’s reserve currency. Until 1971 the dollar’s value was pegged to the US supply of gold, keeping the US currency in “control”. In 1971 President Nixon let loose the gold peg, making the dollar itself as the only thing in reserve.

The US dollar as reserve currency meant that countries were willing to run a trade and exchange imbalance with the US, since this would mean that they would accumulate US dollars in their reserves. This meant that the US tended to have a structural trade and payments deficit with the rest of the world. This  effectively overvalued the dollar, making its imports cheaper than they otherwise should be. And this contributed to the very high standard of living in the US.

Over the decades, the US steadily accumulated a big debt burden. It is now at $14 trillion, or more than 90% of the US’ annual GDP. Among developed countries, it is only Greece and Japan which have higher debt/GDP ratios. Greece has had its debt crisis, and is now forced to undergo a strict program to get rid of its deficit. As for Japan, most of its debt is to Japanese citizens – and thus the impact of the debt is less than if it was held by foreigners.

The US debt is only part of the “US dollar overhang” in the world economic system; because the bigger part (approximately $60 trillion)  is simply the dollar reserves that countries have accumulated, due to the US trade deficit.  The national debt, in the form of US Treasury Bills, is the smaller part of the problem; but it is the more worrisome part of it, since the US has to pay interest on this.

Stumbling into Dollar Fall
The danger is always present that a country would decide to dump their US treasuries, leading to a chain reaction that sees other countries dumping treasuries, a spectacular rise in interest rates, and the dumping of US dollars from national reserves, and the fall of the dollar. This has not happened so far, since no country will do that consciously and devalue their own reserves. But we cannot depend on this not happening in the future. In fact, I think that the chance of this happening is getting bigger with time.

As more and more dollars are sent abroad, in the form of  US Treasury bills or simply “cash”, the danger that they will no longer be accepted by other countries increases. Already, many countries are calling for an overhaul of the international currency system. Countries have to continuously weigh the advantages of holding dollars against the cost due to the continued watering down of the dollar’s value.

Even if no country would willingly cause the dollar to fall by dumping it, a series of smaller events could push things so that even  minor players could accidentally cause such a fall.  The recent intervention against the Japanese Yen had the inadvertent effect of increasing Central Banks’ reserves of dollars. Central Banks all over the world had to subsequently find ways of restoring their dollar reserves to normal levels. The BRICS agreement to use their own currencies when trading with each other means that less dollars need to be kept as reserves. Eurozone countries intervention to support weaker Euro countries’ finances is another measure that strengthens the euro against a potential fall of the dollar. All these make the dollar weaker. A disruption of the scale of the 2007 sub-prime crisis happening now would surely topple the dollar.

Perhaps it won’t even be a single country or investor which would precipitate the dollar’s fall. It could be simply an accumulation of small steps that would push it over the edge. The US high unemployment rate has “forced” the Fed to keep the Fed Funds rate low, but this at the same time increases consumption and imports, and to further trade deficits.

The US dollar is undergoing something like a game of international “musical chairs”. US-based investors buy securities in other countries, effectively moving dollars abroad; Central Banks sell dollars to prevent their currencies from appreciating; the continuing US budget deficit means that the government has to issue more Treasuries;  foreigners buying US equities or Treasuries effectively returns dollars to the US;  too much incoming dollars could cause inflation, and increase unemployment. The cycle continues, and dollars are passed back and forth from the US and abroad.  A growing number of Central Banks are wary of keeping too much dollars, and this cycle would eventually break down at some point.

Tipping Points
There are a number of occasions or events which could push the dollar over the edge. The Debt Ceiling of the US has been reached, and by August 2 the US Congress has to agree to raise the limit. Not to do so will surely bring about a loss of trust in the dollar, and its subsequent fall.

And then will come the budget discussions later in the year. This is another occasion when confidence in the dollar may be critically damaged.  This will be followed by the Presidential election campaign and possibly a new administration.

At any time, Congress may pass a law imposing a tax on Chinese imports. This will cause Chinese countermeasures, including a stop to buying US Treasuries. And this will be enough to precipitate a chain reaction that will cause the fall of the US dollar.

The US dollar will fall within the next 5 years. While it will cause a deep crisis, it won’t be that bad, in the long run. I wrote a blog post about how it will be Two Years After the Dollar Fall