The Navy Discussing Economic Doomsday

The Navy and the Office of the Secretary of Defense for Policy sponsored a policy discussion yesterday focusing on the national security implications of the financial crisis. The featured speaker was James Rickards, the Senior Managing Director for Market Intelligence at Omnis, an applied research organization. As reported in Politico, the four doomsday scenarios Mr. Rickards is focusing on are:

The Bait Effect

Terrorists, and al Qaeda in particular, are fascinated with the idea of destroying the U.S. economy. Rickards worries that the economic meltdown in the United States could serve as bait of sorts for a terrorist attack, as plotters calculate that a strike now could have a “force multiplier” effect because of the already skittish U.S. stock market.

The China Syndrome

The Chinese own more than $500 billion worth of U.S. Treasury bonds, and billons more in the debt of other U.S. entities such as those held by Freddie Mac and Fannie Mae. And a general sense of mutually assured financial destruction keeps them from wielding that debt like a weapon: if the Chinese dumped U.S. debt on the global market, their own holdings of U.S. debt would decline in value, the U.S. economy would be damaged, ultimately harming the Chinese economy by reducing American ability to buy more Chinese goods.

They’d have to be crazy to try it. But Rickards points out that governments don’t always do the rational thing. And in the meantime, their holdings give the Chinese incredible power over American decision making.

The Existential Crash

A pessimist by nature, Rickards believes that many economic forecasters are wrong, and the recession will get far worse than predicted.

He sees an epic disaster scenario in which the U.S. gross domestic product declines by a staggering 35 percent over the next six to seven years. Crippling deflation could take hold. Unemployment, he says, could approach 15 percent.

That’s a calamitous rate, but it would not be an all-time high: unemployment hit 25 percent during the Great Depression.
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In this scenario, the possibilities for global unrest increase dramatically as a staggering United States retreats from foreign aid and global diplomacy and the list of dangerous failed states grows sharply.

The Alternate-Dollar Nightmare

“The Number One vulnerability is the dollar itself,” Rickards concluded. “We’re printing them and shoving them out the door, and the Fed is basically out of bullets. So why hasn’t the dollar collapsed? The short answer is, global investors don’t have any other choice.” That is, there simply aren’t enough Euro- or Yen-backed securities for investors to shift their money out of dollars and into some other currency.

But what if some kind of global coalition - say a trillion-dollar sovereign wealth fund allied with several countries around the world - banded together to create a gold-backed alternative to the dollar?

Why do I mention this in a forum on naval strategy and policy? Mr. Rickards explains:

“The national security community needs to be conversant with this,” Rickards said. “In defense, intelligence, and national security, you earn your money by preparing for things that may be remote, but pose an existential threat if they come to pass.”

Indeed. So, what are the ramifications for the Navy? On one hand, immediate examples seem to be decreased operating and maintenance funds, long-term impact on acquisitions and perhaps even a surge in seaborne instability, like piracy and smuggling. On the other hand, with a global economic crunch potential peer competitors like China and Russia would also be slowed. The possibilities seem endless, so what say you?