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The Generals Survey their Battlefields: Iraq and the U.S. Economy
Congress must be reeling – this week and last, two messengers have delivered bad news on both the domestic and international fronts.
First, Federal Reserve chairman Ben Bernanke uttered a word –"recession"– that Fed heads rarely let pass their lips. He told Congress on April 2 that it looks like the U.S. economy is slipping into recession "in light of the recent turbulence in financial markets."
Second, General David Petraeus told Congress today that the situation in Iraq is too "fragile and reversible" to allow more troops to come home for a while. He and Ambassador Ryan Crocker are trying to explain why Iraq Prime Minister Nouri al-Maliki's failed attempt to wrest control of Basra from Shiite cleric Muqtada al-Sadr's militias is a hopeful sign of unity, rather than a discouraging sign of fragmentation.
Petraeus and Bernanke both face Gordian-knot problems having to do with 1) civil strife in Iraq as the government tries to get on its feet, and 2) a credit crunch in the United States as the economy tries to get back on its feet. Both men are struggling to keep a bad situation from getting worse.
But neither man has the resources to win the respective wars they face. Petraeus may wish he had more troops than the 140,000 he now has in country. Bernanke may wish he could change fiscal policy to help support the economy. As it is, he has only monetary policy at his disposal, which limits him to offering banks lower interest rates. The problem is that banks don't want to extend more credit to customers right now, because they are busy trying to straighten out the bad debt that's already on their books.
Meanwhile, famously rich investor George Soros has written a book, called The New Paradigm for Financial Markets, about the upheaval in the financial markets, which he describes as apocalyptic. Here's an excerpt from a Bloomberg reporter's review of the book:
Yet bankers, hedge-fund managers and regulators should pay heed. For Soros is raising questions that cut to the core of how a credit bubble became a Godzilla that pushed the financial system to the brink, damaged the U.S. dollar and made a recession inevitable.
"This will have far-reaching consequences," writes Soros, 77. "It is not business as usual but the end of an era." [Bloomberg, 4/4/08]
Soros's solution to the problem? "Clearly an unleashed and unhinged financial industry is wreaking havoc with the economy. It needs to be reined in," he writes in his book, which appeared online last week.
So, when the generals (and successful hedge-fund managers like Soros) have trouble seeing ways to win a battle, what are we soldier-citizens supposed to think? Reality begins to sink in. A general might not allow himself to contemplate defeat, but soldier-citizens might begin to conclude that the war we fight isn't winnable. A Fed chief might not allow himself to think that an economic collapse is inevitable, but soldier-citizens might begin to think the collapse is already here, and that we had better stop spending and start saving instead.
Here's how the latest
Elliott Wave Financial Forecast describes this period when even the president of Blackstone (the private equity firm that went public last year at $35 a share and is now trading closer to $18.50) says that "things will get worse before they get better."
At such times,
Conquer the Crash said it doesn't matter what the Fed does, lending officers will become afraid and call in loans and slow or stop their lending "no matter how good their clients' credit may be. Corporations likewise reduce borrowing for expansion and acquisition, fearing the burden more than they believe in the opportunity. Consumers adopt a defensive strategy at such times by opting to save and conserve rather than to borrow, invest and spend."
The good news is that you can do something about the situation – unlike the feeling of watching from afar the war in Iraq and the war on the recession. You can sign up for a subscription to
The Elliott Wave Financial Forecast to read about what our analysts see in the future and how you can prepare for it now.