Neocon’s revenge II

History, it seems, is not without a sense of irony.

You may recall that September 11, 2001 marked the rise in the US of a new breed of foreign policy hawk: The Neoconservatives.

The stated goal of the ‘Neocons’ was a “Project for a New American Century”. Their principles were laid out in 1997 in the founding text of an eponymous think tank:

• we need to increase defense spending significantly if we are to carry out our global
responsibilities today and modernize our armed forces for the future;

• we need to strengthen our ties to democratic allies and to challenge regimes hostile to our interests and values;

• we need to promote the cause of political and economic freedom abroad;

• we need to accept responsibility for America’s unique role in preserving and extending an international order friendly to our security, our prosperity, and our principles.

Signatories to this document included prominent later Bush officials, Dick Cheney, Donald Rumsfeld, Lewis Libby and Paul Wolfowitz. The think tank was founded by William Kristol and Robert Kagan.

Once in power, and following the electrifying effect of the World Trade Centre attacks and the Afghan war, the Neocon agenda turned to the Middle East where its principles of moral purity and American leadership were practically expressed through foreign policies aimed at “regime change”.

In short, the neocons sought to bring about democratisation of the Middle East through the invasion of Iraq. The theory being that a free and prosperous Iraq would so inspire neighbouring peoples that a domino effect would sweep through the Middle East. No doubt aimed ultimately at  the US ally, oil master and “kernel of evil” (as one US analyst famously described it) Saudi Arabia.

Of course, history had other ideas and some 3 minutes after tanks rolled into Baghdad it became obvious that pointing a gun at someone and ordering them to be to free was, on the ground, a somewhat flawed undertaking.

Foreign policy (or was it military) naivete aside, the Neocons did exhibit one other spectacular policy departure from traditional conservatism. That is, they didn’t give a hoot about fiscal deficits, famously (allegedly) captured in the observation of Vice President Dick Cheney that “Reagan proved that deficits don’t matter”.

And, if you’re talking about your foreign creditors, so long as you’re sporting the world’s reserve currency, they most assuredly do not.

Except they do matter somewhere else, at home, in your economy.

Had the regime of George W. Bush concerned itself with balancing the Budget over the last business cycle, the Chinese surplus would have by definition been smaller, US interest rates higher (without recycled Chinsese savings) and its housing bubble smaller, possibly even non-existent.

Meaning that today the United States may not be struggling out of the mire of debt-deflation via its monetary bedfellow quantitative easing.

Yes, and now we come to it. The Neocons were either much smarter that this blogger gives them credit for, or, even less so. For, as is obvious today, all Dick Cheney needed to do was put a call into Alan Greenspan and get him to print up a few extra bob. Greenspan’s successor, Ben Bernanke, told us he would do just that last August and the result since could not have bene more spectacular in soft commodities. Take wheat, for instance:

And now, following Tunisia, we have Egypt erupting in turmoil and protests growing seemingly everywhere across the food-price sensitive North Africa in a picture reminiscent of domino regime change.  Bernanke surely deserves the Nobel Peace Prize!

Anyway, the Fed today recommitted itself to finishing its QE program and US Treasury Secretary Tim Geithner declared that economic growth was insufficient to bring down unemployment.

Econompic has the details of today’s Q4 US GDP growth statistics and makes clear that the two largest contributors to growth are consumer spending and exports. This blogger will observe that both of these in turn rely on the effects of QEII, the first because of the wealth effects of a runaway equity bubble which is, in turn, reliant upon a narrative of emerging market growth and rising commodity prices, which is the second effect.

This blogger concludes therefore that QEIII remains a distinct possibility.

How this trend will affect food sensitive nations is highly unpredictable, except to say that so long as rising food prices continue so will strife.

For starters anyway, below is the Nomura Food Vulnerability Index:

It is interesting to note that Middle East nations do not figure prominently. However, neither do many seem to have been included, with Jordan, Syria, Yemen and Iraq all missing.

As our occasional blogger, Flashman, observed recently, a number of North African nations do sit in the top 10. The most notable from an economic standpoint are Morocco with its dominant phosphate reserves, and Nigeria with its pivotal role in the oil market.

Most worrying for Australia, China features prominently. We will have more on this Monday.

Heaven knows where this will spread next but it seems a fair bet that it will spread. When the blood is up, all things are possible. Tread carefully.