The Curse of Lawrence of Arabia
The Daily Reckoning takes a peek behind the curtain at ‘The Oil Raj’ – a system of governance originated by the British colonialists, adopted by the post-WWII conglomerate known as the U.N., and at the heart of the U.S. case against Iraq. Jack Wheeler reports…
The most legendary American journalist of the 20th century was Lowell Thomas. I had the opportunity to meet him in 1978, when we were both guests on The Merv Griffin Show. Off camera, I asked him, "Do you feel you contributed, however inadvertently, to the political mess that is the Middle East today?" He looked at me sharply and asked me what I meant. "Well, after all," I answered, "it was you who gave Lawrence’s promise to the Hashemites so much power." His eyes narrowed, and he responded, "That was a long time ago."
In 1917, Lowell Thomas was a young, ambitious journalist in search of an interesting story in the lost backwater of World War I. In Jerusalem, he met a small (5 foot 4) British Army captain assigned as a liaison officer to Arabs living in a desert no one had ever heard of. Thomas saw his chance. His breathless dispatches had the purpose of creating a myth around the liaison officer who had begun teaching Arab tribes to blow up Turkish trains nobody cared about in the desert nobody ever heard of.
The liaison officer’s name was T.E. Lawrence, but Lowell Thomas called him "Lawrence of Arabia." In 1919, Thomas went on a lecture tour in the United Kingdom and United States, showing pictures of Lawrence posing in a sheikh’s robes in a London studio, and entranced audiences with stories about the ‘White King of the Arabs.’ By the time the Treaty of Sèvres was negotiated in 1920, with Lawrence in attendance and the media mob hanging on his every word, the British felt compelled to keep Lawrence’s promise to the chieftains of an Arab tribe called the Hashemites.
The political structure of the Middle East today is the result of that promise. The Treaty of Sèvres permitted the British to seize pieces of the Ottoman Empire, which had ruled the Middle East for centuries, but joined the Germans in WWI. Instead of British colonies, the pieces were called League of Nations ‘mandates,’ for which the Brits needed puppet rulers.
One of these ‘mandated’ areas was the west coast of Arabia, a desert region called the Hejaz. Lawrence had promised the chieftains of the Hashem tribe that if they would join the British against the Turks, they would get to rule the Hejaz as their own kingdom. Thus the Hashem patriarch, Hussein Ibn Ali, became the King of the Hejaz.
At Lawrence’s insistence, the Brits installed Ali’s son Feisal as ruler of the ‘mandate’ of Syria, divided the ‘mandate’ of Palestine in two, and installed Feisal’s brother Abdullah as ruler of the part east of the Jordan River (the western part eventually became Israel 28 years later, no thanks to the British).
Lawrence (and Thomas) had bought into the phony claim that the Hashem tribal leaders were directly descended from Mohammad himself. The Hashemites claimed that this assumed mantle of Islamic holiness gave them a right to rule, without elections, all Arabs everywhere. So the Brits created the Hashemite Kingdoms of Hejaz, Jordan and Syria. Except, the chieftain of the Wahhabi tribe from central Arabia, Abdul Aziz ibn Saud, kicked Ali out of Hejaz, took it over, and called his entire conquered area Saudi Arabia – while France claimed Syria was their ‘mandate’ and kicked out Feisal.
As a consolation prize, Lawrence insisted the Brits install Feisal as the ruler of yet another "mandate," that of Mesopotamia. Created out of three former Ottoman vilayets (provinces) without any regard to national coherence, this area was renamed Iraq. The Hashemite Kingdom of Jordan still exists (the current ruler, Abdullah II, is the first Abdullah’s great-grandson), but the Hashemite Kingdom of Iraq was erased (with the entire "royal family," including Feisal’s grandson Feisal II, slaughtered) by a military coup in 1958. Through the help of Soviet KGB agent Yevgeny Primakov, Saddam Hussein completed his control over the Iraqi military regime by 1979.
The bottom line to this saga is that Iraq is not a real country – like, say, Persia (Iran) which has existed for 2,500 years. It is an artificial construct and can only be held together by force. Iraq and its people have no history of nor familiarity with democratic institutions. The three former vilayets of which it is composed still have no mutual cohesiveness. Mosul in the north is Kurdish, Basra in the south is Shiite Arab, Baghdad in the middle is Sunni Arab. The Kurds, Shiites and Sunnis all hate each other. It takes a Saddam to hold the place together.
And that’s why Saddam has been kept in place and allowed to ignore all those U.N. Resolutions. A disintegrated Iraq could easily mean an independent Kurdistan, which the millions of Kurds in Turkey, Syria and Iran would clamor to join, splitting apart those three countries. It could mean an independent Basra, or just an inchoate anarchy, another Somalia. The fear of these post-Saddam scenarios is what drives much of the international frenzy against GW taking Saddam out.
It is to GW’s enormous credit that he has the intelligence to realize that the threat of Saddam’s rule vastly outweighs the threat of its dissolution, and the determination to eliminate the former. It will be near impossible, however, to eliminate the latter. Let us hope that GW accepts this reality and assiduously avoids desperate attempts to put the Humpty Dumpty of a post- Saddam Iraq back together.
America’s and the world’s security must no longer be held hostage to a promise made by a junior British officer to a bunch of camel-herders wandering around a lost desert 86 years ago – a promise made important by an ambitious journalist’s romantic froth of promotional puffery, resulting in incalculably tragic consequences as the Curse of Lawrence of Arabia.
for the Daily Reckoning
November 8, 2002
A Real-Life Indiana Jones
Dr. Jack Wheeler climbed the Matterhorn at age 14 and swam the Hellespont at age 16 (LIFE Magazine 12/12/60). His Ph.D. in Philosophy from the University of Southern California led to numerous articles on geo-politics in the early 1980s, where he informally advised the Reagan Administration on ending Soviet Communism in Latin America and Eastern Europe. Wheeler’s geo-political insights inform the investment strategies at Strategic Investment.
The unkindest cut?
The Dow fell 2% yesterday – 184 points, as investors began to wonder if analysts looked around for a reason and if the 12th Fed rate cut would do more good than the 11 before it.
The Fed began cutting rates nearly 2 years ago. After the first one, we recall economist Ed Yardeni saying something like: ‘Don’t worry. If this doesn’t work, the Fed still has 600 basis points to go.’
Yardeni was famous for two remarkably wrong ideas. It was he who had made the Y2K scare respectable, encouraging the Fed to make additional liquidity available, just in case. It was he, too, who had thought he had discovered a new race of human beings at the end of the ’90s – digital man, the guy who ‘got it.’ What he actually discovered, it turned out, was the old race of homo sapien ignorantus, who thought himself a genius after a quarter-century bull market.
Digital man seemed to go extinct only months after Yardeni discovered him – after the crash of the Nasdaq. And the Y2K problem was, of course, a total flop. We guessed that Yardeni would be wrong about rate cuts, too. At the time, the Fed funds rate stood at 6%, and the savings rate was near zero. ‘Before this is over,’ we think we remember writing, the Fed funds rate will be at zero and the savings rate will be at 6%.
Both are getting close.
Why would Yardeni think rate cuts would work? Because they have always worked in the past, he would answer.
He may not have looked back far enough. As Alan Greenspan noted, you’d have to look in ‘dusty old history books’ to find a period similar to our own. Of course, neither Yardeni nor the Fed chairman would want to do that.
In the present downturn, unlike the typical post-WWII slump, there has been no shortage of credit or confidence. Au contraire, there’s been too much.
"Home lending explosion has created more than just a record number of McMansions," reports a Dow Jones newswire. "There are also record numbers of homeowners now in bankruptcy protection."
Chapter 13 has become required reading for many Americans, thanks largely to the encouragement of Alan Greenspan and the credit industry. Mortgage debt has risen 50% in the last 4 years, to $5.7 trillion. The number of people asking for Chapter 13 protection is rising at an 8% annual rate.
"I think we’re seeing only the front end of the wave," says Elizabeth Warren, a Harvard professor who specializes in consumer bankruptcy. One out of every 5 homeowners has refinanced his home in the last 12 months.
The nice thing about Chapter 13 is that it allows you to hold onto your home; you have to promise to catch up on your payments, but you can take years to do so.
Mortgage lenders say that refinancers use the money to pay down other debt. But fewer than one in three of them did so in the last year. Meanwhile, revolving debt has risen 5% per year for the last 5 years.
Job losses, bankruptcies, less overtime, falling prices – all were beginning to have a sobering effect on the U.S. consumer, we thought. But along comes Alan Greenspan on Tuesday, like a man coming to an AA meeting with a bottle of whiskey under his arm.
Another rate cut will allow the biggest, longest-lasting, and most reckless lending spree to continue a while longer, he hopes…at least until his term is over.
We’re not sure. Auto sales are dropping fast. Usually, at this stage in the business cycle, consumers have ‘pent up demand’ for items such as cars and houses. Then, a rate cut can push them towards making the purchase. But after getting used to zero-percent financing, even 1.25% looks like up.
More credit may or may not be what the American consumer wants. But thrift is what he needs. Sooner or later, we keep saying, he’ll have to realize it. When that happens, even Mr. Greenspan’s 80-proof will not prevent the economy and stock market from going where they are destined to go.
In the meantime, we’re enjoying the show. Like watching a drunk make his way over the ice, we’re just waiting to see how he falls.
Dan Denning is back again today, with more market news for you…
Dan Denning, reporting from Paris…
– "Is that 15 zeros or 18 zeros?" Françoise asked me. "I have no idea," I said, "But it’s a lot of money." The rest of the office briefly joined me in figuring out just how much a quadrillion is. The confusion was prompted by a headline from The Daily Yomiuri, "Asset Deflation Costs 1.16 Quadrillion Yen." I haven’t used the word quadrillion since making a bet on the playground in 3rd grade. And I was only joking then.
– It’s no joke in Japan. The article referred to a white paper released by the government. The paper concludes that the total value of the country’s assets – including land and stocks – has declined by 1.16 quadrillion yen since the bursting of the bubble in 1990. The consensus here in the French office is that a quadrillion is a thousand trillion, or 18 zeros.
– The destruction of a nation’s wealth is surely no laughing matter. And using a funny-sounding term to describe the total collapse of an economic system doesn’t begin to do justice to the scope of the damage. One thing is for sure: that kind of asset destruction could never happen in America.
– Or could it? Just this morning I spoke with Dr. Kurt Richebächer on the phone. Dr. Richebächer is our resident Austrian economist – he identifies the excesses of credit markets and their effects on asset values. He’s been busy the last 10 years. He told me he’ll be making a trip to New York City later this month to visit with his old friends Paul Volcker and Henry Kaufman.
– The old school of inflation fighters know Dr. Richebächer pretty well. But the new school of would-be inflation igniters has no idea how bad things are going to get, especially for the dollar. Dr. Richebächer, who’s working on a book about the U.S. asset bubble, told me, "you have no idea how bad it’s going to get, my dear." "Hasn’t it already been pretty bad?" I replied, referring to the $9 trillion in stock market wealth wiped out. "Yes, my dear, yes. But not as bad as it’s going to get."
– For its part, the market is paying no heed to Dr. Richebächer’s dire warnings. But already Wednesday’s rate cut is losing its potency. Used to be you could throw a rate cut in the middle of a room full of stock traders and you’d get a party that would make even Dennis Kozlowski blush. But now, some investors are complaining about the rate cuts. – As we noted in this space yesterday, rate cuts punish savers by reducing the yield on cash savings to near zero – and sometimes below zero after a firm’s management fees are included. A negative rate of return is a powerful incentive to get out of cash and into something else…something like…say…stocks. Perhaps that’s what the Fed had in mind all along. Pushing that $2 trillion in the money market off the sidelines and into the stock market game.
– But is the Fed fighting a losing battle with investors? After all, even a 1% gain is better than losing 12% a year. That’s right, even after October’s bear-killing rally, the Dow is down 12% for the year. And even with October’s rally, Merrill Lynch reports that mutual fund investors took $20 billion out of stocks for the month. That makes it five straight months of net outflows (redemptions exceeding new money). Altogether, some 3.3% of total mutual fund assets that were under management in May have now left the playing field. Will a rate cut reverse this kind of defeatism?
– Or will it just make things worse, and show how ineffective the Fed is at igniting stock market rallies? If anything, the Fed may ignite a bear market in the dollar. Instead of making dollar-denominated assets more attractive, the Fed is lowering the yield on the dollar. Michael Derks, a strategist at the Commonwealth Bank of Australia in London, says: "It seems as though the dollar is responding to interest rate differential arguments rather than interpreting the Fed’s move as bold and stimulatory for the economy."
– He was referring to the fact the European Central Bank, unlike it’s Fed counterparts, did NOT cut rates. And by holding the line, they make euro-denominated assets more attractive. For example, fixed-income investors on three- month euro deposits now get a yield 1.63% higher than dollar-burdened investors. Even if the dollar loses value in big chunks, it’s still a long way from $9 trillion to $1.16 quadrillion. But maybe not as long as you think.
Back in New Orleans…
*** GU-DD. The price of gold rose yesterday. The dollar fell. Mark the trend. The dollar is now worth less than the euro, but not as much less as we think it will be.
*** And guess what? Prices are falling. The latest chain- weighted Fed numbers show that the prices of goods are in outright deflation – they fell 0.8% in the last quarter. Only services, still rising at 1.8% per year, keep the overall inflation rate positive. But even in services, the inflation rate is falling fast. Like Germany and Japan, the U.S. could be in deflation soon.
*** The Fed is spooked by these numbers, we think. Investors will spook too, if not tomorrow…sometime in the next 10 years.
*** But there is good news, I told the audience at the New Orleans Investment Conference yesterday. Back in the 60s, Charles de Gaulle noticed that the U.S. could make the dollar worth whatever it wanted. At the time, the ‘gold window’ at the Fed was still open; a foreign nation could still step up and ask to have its dollars redeemed for gold. De Gaulle figured he would rather have gold than dollars and started a trend.
By 1972, the Fed was alarmed. Gold was rushing out too fast. So, Nixon ‘closed the gold window,’ setting off a boom in the gold market that carried the price of the metal up 2,000%.
If a government wanted protection against the dollar, they had to buy gold on the open market – which drove up the price.
But individual Americans were prohibited from owning gold. My friend Jim Blanchard, who began this New Orleans conference, started a "Committee to Legalize Gold." After a few years, he succeeded.
Which brings us back to the good news. The ‘gold window’ at the Fed is still closed. But there is a gold window open in the market. By the end of the ’70s, you could buy the Dow stocks for about the same price as an ounce of gold. Gold investors thought they were geniuses. Today, an ounce of will barely buy 4% of the Dow, and goldbugs – including your editor – are widely considered idiots.
But a major bear market has a way of turning things around.
Our advice is the same as de Gaulle’s: take advantage of the gold window while it is still open to you.
*** "My two daughters couldn’t be more different," I explained to a friend yesterday.
Maria, a fashion model, has become very critical and demanding – like the French. She holds herself up straight and sometimes seems almost haughty in her bearing, as well as her conversation..
Sophia, a college student, is much more easygoing. "She is more American," I said. "She is relaxed, wears blue jeans and sweat shirts…and is likely to slouch, no matter how many times I tell her not to."
Maria, the younger girl, is more confident and has her father wrapped around her little finger.
Sophia is more timid and more independent, much less apt to turn to her father for advice or money.
"I have a hard time staying in close touch with Sophia," I told my friend, who knows them both. "We don’t seem to have much in common or much to say to each other when we’re together."
"Yes," he replied, "but she’s the one who needs you most."