The US, North Korea, and the Lesser of Two Evils

By Jacob L. Shapiro and George Friedman

Most US presidencies are defined by their foreign policies, and most foreign policies are defined by wars—those that were fought and those that weren’t.

Of course, some wars are more significant than others. The Civil War and World War II defined the presidencies of Abraham Lincoln and Franklin D. Roosevelt—but then they would have defined the presidencies of anyone occupying the office at those times. Even just the possibility of war can have the same effect. Jimmy Carter learned this through the Iranian hostage crisis and Barack Obama through his evaporating red line in Syria.

The biggest decision an American president faces is whether to send the nation’s soldiers into certain danger to protect and defend the national interest. Donald Trump is fast approaching that point with North Korea, and his decision will define his presidency more than any of his infamous tweets or off-the-cuff remarks.

Mixed Messages

The US has been sending mixed messages for months now. It briefly stationed three carrier battle groups within striking distance of the Korean Peninsula, before relocating them. One minute, the president is threatening to bring fire and fury to Pyongyang. The next minute, the US secretary of defense is saying diplomatic efforts to de-escalate the situation are working.

This cannot go on indefinitely. US military forces cannot remain in a constant state of readiness. Eventually, the United States’ inaction will turn into a decision not to strike. Rarely are decisions such as this black and white, but if the administration believes its own intelligence, it has a fairly stark choice: accept a nuclear North Korea and the attendant consequences, or attack North Korea and accept the attendant consequences.

Trump has sought to differentiate himself from Obama, but ironically he finds himself in a situation similar to that of his predecessor, except with much higher stakes. In August 2012, as the civil war in Syria was escalating, Obama said the US would see any use of chemical weapons by the Bashar Assad regime as crossing a red line. There was no “fire and fury” in Obama’s comments, but his statement set up a situation in which Obama either had to act on the threat or back off.

A year later, the Assad regime used chemical weapons—and Obama backed off. It damaged US credibility in the world and made Obama look like a president who wouldn’t follow through on a threat. It was one of those moments when words made a difference. It changed the perception of the global superpower in the eyes of others who might seek to challenge it. And in the two years that followed, Russia annexed Crimea, and the Islamic State became a formidable force in the Middle East. These events may not have been a direct result of Obama’s inaction, but it is without doubt that many took notice.

It’s not an unprecedented problem, even in US relations with Korea. Former Secretary of State Dean Acheson pushed Harry Truman into the Korean War by delivering a speech in January 1950 in which he did not include South Korea as part of the US defense perimeter in Asia. It wasn’t an unreasonable omission, as South Korea is not of existential importance to US strategy. But it had the unintended consequence of signaling to Russia, China, and North Korea that the US would not intervene in the event of an invasion of the recently divided Korean Peninsula.

When North Korea did invade, with tacit support from both Russia and China, the US faced two unsavory choices: maintain the containment line but risk the lives of tens of thousands of US soldiers, or save the country from a war that was ultimately not a threat to Americans, but sacrifice US credibility. Acheson himself once said prestige “is the shadow cast by power, which is of great deterrent importance.” Truman agreed and so the US went to war to defend its image, for better or for worse.

High Stakes

The US is inching perilously close to such a moment again. Both sides have issued threats, and while there remains a sliver of hope for a diplomatic solution, they still have imperatives so diametrically opposed that it is hard to imagine either side will capitulate. North Korea has staked the legitimacy of its regime on resisting the US and all other enemies for over half a century. The US faces the same situation it faced in 1950: uphold its security guarantee, or risk sending the signal that it is ceding some measure of power in the Pacific.  

And so the question is, now that Trump has threatened to destroy North Korea if it continues its nuclear program, will the US speak loudly and carry a big stick, or just speak loudly? A North Korea with nuclear weapons is dangerous—but so is a nuclear-armed Pakistan and India, and the US didn’t stop them (or a host of other nations) from attaining nuclear weapons. North Korea wants nukes as a deterrent to ensure its survival, but using them would ensure its annihilation. The chances, therefore, that Pyongyang will use nukes are very slim. But when losing means the devastation of Los Angeles or Seattle, even betting on long odds is dangerous.

Having staked this much on the North Korea issue, the US risks being seen as weak if its threats turn out to be empty. That may seem like a hollow concern, especially in a world where the US is without peer in terms of its power… but it does have would-be peers. China still faces many internal issues, but it also has significant long-term ambitions, and the US is standing in its way. We at GPF are generally skeptical about China becoming a global power, but it is a significant regional power right now, and it will get more powerful before its domestic constraints cut it down to size. There is already a sense in China that Trump is a “paper tiger” whose threats carry little meaning, and failing to follow through on North Korea would do much to solidify that opinion and embolden Beijing.

And should Trump’s threats turn out to have some teeth, China might even benefit if the US, which is seen as an imperial power in most of Asia, initiates another war on the Korean Peninsula. What China (and especially President Xi Jinping’s government) needs most—more than control over the South China Sea or a policy to spread wealth equally among disparate social classes in China—is a way to hold Chinese society together through the economic and demographic challenges that are coming its way. Chinese nationalism is a powerful adhesive, and a formidable and looming enemy in the form of the US would make it that much stronger. It is often assumed China wouldn’t risk conflict with the US because it can’t beat the US, but perhaps China doesn’t need to win so much as it needs unity. And perhaps a limited conflict with the US—even if China looks weak in the immediate term—is not such a bad outcome.

The Korean War ultimately wasn’t about Korea; it was about great powers needing to fight battles in faraway places to show how powerful they are. That hasn’t changed. The US has a decision to make, and then China, Japan, and Russia will also have decisions to make. Koreans on both sides of the DMZ will bear the costs of those decisions once more. The next step, however, in this unfolding drama is for the US to decide which is the lesser of two evils: a nuclear North Korea or another land war in Asia. That choice will define how this administration is remembered far more than the political melodrama polluting our airwaves daily.

Where Europe and the Middle East Meet

By Jacob L. Shapiro

Paris. Nice. Brussels. London. Manchester. Europe’s is a long and sordid catalogue of terrorist attacks. The incidents in Barcelona and Cambrils – both in Spain, both within the past week, both claimed by the Islamic State – are only the latest entries.
Terrorism is a phenomenon with which Europe is all too familiar. Consider World War I. The proximate cause of the conflict was an act of terrorism – the assassination of Archduke Franz Ferdinand in Sarajevo. Consider the year 1972, when, in Munich, Black September, a secular Palestinian militant group, killed members of the Israeli Olympic team. That same year was also among the bloodiest of the Troubles of Northern Ireland. The situation was so bad that then-U.S. President Richard Nixon asked the United Nations “to combat the inhuman wave of terrorism that has been loosed on the world.”
The U.N. wasn’t able to do much. Just 13 years later, terrorist organizations carried out multiple attacks on civilian targets: TWA Flight 847, an Italian cruise ship, airports in Vienna and in Rome. In 1986, the Libyan government, led by Moammar Gadhafi, sponsored an attack at a club in West Berlin – to which the U.S. responded with airstrikes. Ronald Reagan said 1986 was the year “the world, at long last, came to grips with the plague of terrorism.” Two years later was the Lockerbie bombing.
The times we live in are not special. Terrorism has long been a part of European life.
Terrorism Is Just Terrorism
In fact, more people died from terrorist attacks in the 1970s and 1980s than in any recent decade. But, notably, in the 1990s and 2000s, terrorism-related fatalities in Western Europe decreased substantially. It’s hard to know for sure why this was so. Europe wasn’t any more peaceful in the 1990s than in the previous decades, as the Balkan wars made abundantly clear. Perhaps the end of the Cold War indirectly had an effect.

Whatever the reason for their remission, casualties have since risen dramatically, especially in the past 10 years. There was a lull before the relapse; the United States bore the brunt of the Islamic world’s attention after 9/11. But when the revolutions al-Qaida hoped to incite failed to launch, Islamists found new targets in Western Europe. Partly this is because of the influx of Muslim immigrants, some of whom struggled to integrate to the countries to which they migrated. Europeans consequently became more nationalistic, making Muslims the object of their resentment. Islamists saw this as a major opportunity for recruitment.
The threat posed by Islamist terrorism is undeniable, but the attention it receives exceeds its significance. Technology is certainly a factor in this regard. In the 1970s, TV journalism changed the way we experienced war. War has always been brutal and unsparing, but seeing it made it real in ways it had not been before. The 24-hour news cycle similarly magnifies terrorism. 9/11 was shocking by any measure, but that an entire nation watched the Twin Towers fall in real time personalized the attack in previously unknown ways. With the rise of social media and the advancement of smartphone technology, virtually anyone is able to document the horrors of an attack, and every group that uses terrorism has that much larger a platform to share its grisly acts. How much more grisly and effective might the IRA or ETA have been if they had been able to use YouTube and Twitter?
Other factors abound. Some may argue that the religious motivations of Islamist terrorism add to its barbarity, but that misses the point. Terrorism is a tactic, and those who employ it are necessarily devoted to their causes. Some may argue that Islamist terrorism is tantamount to a foreign attack and, as such, cannot be compared to domestic affairs such as Irish civil unrest or Basque separatism. But civilians die either way. At some point, the distinction among the varietals of terrorism isn’t helpful. At some point, terrorism is just terrorism. Overemphasizing its impact is what justifies its employment.
The Virtue of Self-Determination
What happened in Spain last week, however, is not just about trends in terrorism on the European continent. The attacks in Barcelona and Cambrils did not just occur in Spain. They occurred in Catalonia, a region of Spain that may not be a region of Spain for much longer. Nationalism has been rising not just in Catalonia but throughout Europe, accelerated by the 2008 financial crisis. But nationalism is particularly pronounced, even resilient, in Catalonia. All attacks matter. But that the Spanish attacks occurred where they did and when they did matters geopolitically.
Months ago, the Catalan government announced plans to hold an independence referendum on Oct. 1 against the expressed wishes of the Spanish government in Madrid. This will be the second such referendum in three years. The first passed with more than 80 percent support, but less than half the population voted. Various opinion polls show that if this referendum does indeed go to a vote, it promises to be a close one.
Relations between the regional government in Catalonia and the Spanish government in Madrid have been strained for years. Spain has threatened to punish any Catalan official enabling what Madrid sees as an illegal referendum. In a not-so-veiled threat, Spain’s army chief said in 2014 that his forces were ready to uphold the Spanish Constitution in Afghanistan or Valencia. Catalonia’s police chief resigned in July, ostensibly because he does not support independence – but Catalonia’s interior minister insisted a week later that Catalonia’s police forces would facilitate the upcoming referendum.
It is unclear exactly what the Catalan government’s objective is. Is the referendum a ploy to try to provoke a Spanish overreaction, thereby increasing support for the Catalan cause? Or does the regional government mean to go through with the referendum, potentially challenging the legitimacy of the Spanish state and creating a hard set of decisions for Madrid on how to respond? Supporters of Catalan independence point out that Catalonia generates about 20 percent of Spain’s gross domestic product and that Catalonia has succeeded in reducing its budget deficit in recent years to just 0.9 percent of GDP in 2016. Critics of Catalan independence point out that Catalonia’s 35 percent debt-to-GDP ratio and the various impositions Spain and the EU could impose on Catalonia make independence a moot point: Catalonia wouldn’t be able to survive on its own.
People display flowers and candles to pay tribute to the victims of the Barcelona and Cambrils attacks on the Rambla boulevard in Barcelona on Aug. 22, 2017. LLUIS GENE/AFP/Getty Images
And now it appears that the Islamic State has joined the fray, if only to make its enemies experience a little more chaos. Already both sides of the Catalan independence issue are exploiting the attacks for political purposes.
Independence supporters are suspicious that the central government is using them to crack down on all political activity and thus to prevent a referendum from even taking place. (Madrid has, in fact, beefed up security in Catalonia.) Spanish leaders such as Prime Minister Mariano Rajoy, meanwhile, hope the attack will enable them to brush the Catalonia issue under the rug, appealing to the shared fight against IS as reason to let bygones be bygones.

The secession issue is simple, if not easy. Spain thinks Catalonia is part of the Spanish nation. Catalonia is not sure, and a significant faction of Catalans, invoking the virtues of self-determination, want to decide as much for themselves.

Fair enough, but this is the kind of environment in which the Islamic State’s tactics thrive. Remember that the group rose in Iraq not from strength but from the strife between Sunnis and Shiites. Catalonia and Spain aren’t Sunnis and Shiites, of course, but for the Islamic State, division is an opening, a weak point that it probes for nefarious ends.

The Moroccan nationals who plowed into the civilians in Barcelona and Cambrils set in motion a chain of events that now must be accounted for. Perhaps the Catalan government meant for the referendum to be a ploy to gain concessions for greater autonomy from Madrid, but now that Spain is using the attacks to crack down, the referendum must go forward no matter what. Or perhaps the excuse of an Islamist attack makes the Spanish government act in a way it wouldn’t have without the guise of ensuring security. Whatever the case may be, the situation in Catalonia was already dynamic, and attacks there only introduce more variables that may well shape its outcome.
An Intersection
And yet there are even larger forces at play. Spain does not belong to Europe, at least in the opinion of the Islamic State. Spain is a Muslim land. The Moors ruled this area, known to them as al-Andalus, intermittently from the 8th century to the 15th century, when they were at last driven out entirely. The Islamic State sees Spain as a place to be reclaimed. And it makes sense for the Islamic State to reclaim it, at least from its leaders’ point of view. Islam is the only force in the Arab world that has ever united all its tribes under a single banner. With the Islamic State’s caliphate shrinking, surrounded as it as on all sides by enemies in the Middle East, it needs to inspire its rank and file. Successful attacks, especially in lands it used to control, fit the bill perfectly.

This illustrates the troubled relations between Europe and the Middle East. These two regions have always been connected to each other, and what happens in one affects the other. Instability and violence in the Middle East has led to Muslim migration to Europe. Muslim migration has, in turn, stoked nationalism, sometimes to electoral effect, and has even led to limited European involvement in Muslim wars. This reinforces the belief that Muslim immigrants can’t be accepted by their new countries and wouldn’t want to be even if they could.

In the middle of all this, then as now, is Turkey, a rising power in the region, an area at which Europe and the Middle East meet. Whichever government occupies present-day Istanbul has been able to project power in every direction, and so has been uniquely suited to arbitrate, or suffer under, European and Middle Eastern interests. It was, for example, ground zero in negotiations to house many of the Middle Eastern immigrants whom Europe could not. So far it has largely abstained from the fight against the Islamic State, but a country of its importance, and of its potential, probably can’t stay neutral forever. In the clash of European and Islamic civilizations, Turkey cannot help but be caught in the middle.

This is what makes the attacks in Spain so notable. Terrorism in Western Europe has been steadily increasing since about 2005. Nationalism has been rising in Europe since around the same time. The age-old conflict between Europe and the Middle East, Christendom and Islam, is simmering once more. What happened in Spain last week intersects all three.

What´s Next For Gold? Its All About The U.S. Dollar

By: Kelsey Williams

What’s next for gold? Seems like a fairly simple question. Unfortunately, it is nearly impossible today to get a simple answer. That’s the problem.

Why is that? And, if we can find a simple, straight-forward answer, how do we know the answer is correct?

Perspective and intent are factors. But so are logic and accuracy.

It is likely, though, that most people who ask the question, “What’s next for gold?”, are generally inquiring about its price. In other words, what will the price of gold be next week? next month? next year? And – generally speaking – advisors, analysts, and others try to answer accordingly.

But logic and accuracy are extremely critical. And if one is a short-term trader, timing becomes just as important. A quick, upward or downward movement of fifty dollars per ounce, with proper timing, can be very profitable – or not – to a trader or speculator.

When one is focused on the price of gold, there is a tendency to overlook its true value. Discrepancies between prices and fundamental values occur often but are eventually resolved.

In other words, prices and values seek and find equilibrium. Insofar as gold is concerned, the yellow metal was overpriced in August 2011 at $1900.00 per ounce. And it was underpriced in December 2015 at $1040.00 per ounce. Price and value for gold are currently at equilibrium.

That means that a gold price within its current range of $1200-1300.00 per ounce represents fair value. More specifically, $1250.00 per ounce is consistent with the decline of over ninety-eight percent (98.25%) in the dollar’s value since 1913.

So what’s next for gold?

We can answer the question very simply by changing one word. Ask instead “What’s next for the U.S. dollar?”

Answer that question and you will know what to expect regarding the price of gold.

The U.S dollar is a substitute for gold (i.e. real money). The price of gold is an inverse reflection of the changing value of the U.S. dollar. The ongoing, never-ending deterioration of the dollar’s value means ever rising gold prices over time.

If you think the U.S. dollar will increase its rate of decline, you will want to make sure your net worth includes substantial holdings of physical gold.

If, on the other hand, you expect a stable or stronger dollar, at least for the next few years, then gold won’t hold the same appeal. Its price would remain relatively stable or even decline as the dollar strengthens temporarily. This is epitomized by the scenario we have witnessed since gold’s high in August 2011 at close to $1900.00 per ounce.

Unfortunately, the cumulative effects of the Fed’s intentional inflation have left the dollar in an unusually precarious position. Any strength/stability in the dollar is relative to how bad things were most recently. And it is increasingly vulnerable to extreme volatility.

While there are some very interesting, and logical sounding analyses of gold, the majority of them are not helpful for the purpose of understanding gold. For the most part, they actually create confusion and lead to unrealistic expectations.

Calculations and predictions for the price of gold based on assumptions of correlation and causal factors are fundamentally flawed.

Gold’s price is not an indication of its value. Its price is a reflection of the value of the U.S. dollar. As the dollar continues to lose value, gold continues to rise in price.

Since the inception of the Federal Reserve in 1913, the U.S. dollar has lost more that ninety-eight percent of its value. Gold has reflected the decline of the U.S. dollar in its price increase from $20.00 per ounce in 1913 to $1270.00 per ounce currently. That is an increase of more than sixty fold.

The case for gold is not about price. It is about value. Gold is original money and a store of value. And its value will become readily apparent when governments and individuals are scrambling amid the ruins of our financial system looking for something, anything, to replace worthless paper currencies, which are nothing more than substitutes for real money.

In the meantime, accumulating physical gold for your own financial survival might be a good idea.

Experts and Inequality

Kaushik Basu
. Philip Hammond

NEW YORK – Ten years ago this month, the world glimpsed the first clear signals of an economic crisis that, a year later, would be in full swing, creating economic hardship of a kind not seen since the Great Depression of the 1930s. The deep recession that followed the near-collapse of the global financial system in 2008 caught nearly everyone by surprise – including the experts who were presumably the best equipped to see it coming.
In November 2008, less than two months after the failure of the US investment bank Lehman Brothers, a visibly irate Queen Elizabeth II, visiting the London School of Economics, famously asked, “Why did nobody notice it?”
Over the last decade, a range of answers has been offered, with experts being blamed for arrogance, complicity, or being just plain overrated. And the context was dire, with jobs lost and balance sheets shrinking. The queen’s own personal wealth had fallen by £25 million ($32.1 million) since the start of the crisis (though the decline was from a very high base.)
Now, with the perspective offered by the post-crisis decade, we may be in a better position to answer Queen Elizabeth’s question. But we must first consider more broadly the challenges confronting economists and financial experts in today’s world – challenges that remain poorly understood, by contemporary economics’ critics and defenders alike.
The first problem is that for certain types of economic phenomena – such as financial recessions, stock-market crashes, or exchange-rate fluctuations – it is logically impossible for anyone to be known to be forecasting accurately far in advance. This does not mean that no one has the ability to foresee a crash, but rather that no one can be known for having that ability. If someone does have such a reputation, their predictions can become self-fulfilling prophecies: if they predict, say, a stock-market crash, everybody will begin to sell their shares, bringing about the predicted outcome.
A second problem of expertise arises from the fact that it is not always in the interest of experts to reveal what they do and do not know. Most people would prefer to show off their expertise, perhaps exaggerating how wide a field it covers.
Of course, this does not negate the value of experts. For example, when I was an adviser to the Indian government, a decision was taken to sell some 3G spectrum. Some of us argued that the government should use professionally designed auctions – an area where economists have expertise akin to engineers – instead of selling the asset for a pre-determined price. India’s political leaders listened, and the spectrum, which had been valued by bureaucrats at $7 billion, sold for an astonishing $15 billion.
But there are many fields where economists’ knowledge is highly imprecise and comes with significant provisos, which may not be fully understood. This may be because decision-makers choose not to pay attention; but it may also be because economists themselves do not spell out the risks.
This risk is all the more acute in a world where scientific and technological progress is taking us into uncharted territory. The decisions that must be taken in response to these developments – those related to the nature of the world or those we have created ourselves – require as much accurate information as possible.
Increasing complexity is reflected in contemporary law and policy. It is common nowadays for people to conclude contracts that are so long and convoluted that signatories do not know what they entail (this was a major factor contributing to the subprime mortgage crisis in the United States, which fueled the global economic crisis and subsequent Great Recession). Likewise, central banks nowadays intervene in ways that often are poorly understood by those most affected.
The upshot is that we are increasingly reliant on experts. And experts may decide to use their know-how not just to address the challenges ahead, but also to serve their own interests.
This is an age-old problem. In the seventeenth century, the economist and investor Sir William Petty was tasked with surveying large swaths of army land, much of which lay fallow, in Ireland. He did a good job, using some truly innovative methods. But he also ended up personally owning much of the land he had surveyed.
This “Petty problem” is likely to become worse, as the world’s complexity – and, thus, its reliance on expertise – increases. This will do nothing to endear experts to ordinary people.
Already, many parts of the world, from the US to India, are experiencing a surge in right-wing populist sentiment that is rooted at least partly in mistrust of experts, who are perceived as self-serving.
It is not immediately clear how the Petty problem can be solved. But we must acknowledge its existence – and recognize that it is intimately connected to high and rising inequality in much of the world. Moreover, we must address inequality head on, by limiting the gap between the richest and poorest. If, for example, it becomes impossible for a CEO to earn more than a certain multiple of what the average worker in his or her firm is paid, there will be a limit to how much ingenuity the CEO directs toward pure self-enrichment.
Of course, imposing caps on executive compensation is a blunt instrument for fighting inequality. But more nuanced policymaking – often based on the misguided assumption that companies can be trusted, or induced, to self-regulate – has failed. The time has come for measures that everyone can understand.