Syria, Iran and the Power Plays over Iraq

By George Friedman

In assessing the current phase of events in
the Middle East, it is essential to link events in Syria with events in
Iran. These, in turn, must be linked to the state of the war in Iraq and
conditions in the Arabian Peninsula. The region is of one fabric, to say the
least, and it is impossible to understand unfolding events -- the pressure
against Syria involving the murder of a former Lebanese prime minister;
feints and thrusts with Iran and talk of direct political engagement with
the United States; the emergence of a new government in Baghdad, or
obstacles to one -- without viewing them as one package.

Let's begin
with two facts. Since the Islamic Revolution in Iran, Tehran has had close
collaborative ties with Damascus. These have not been constant, nor have
they been without strains and duplicity. Nevertheless, the entente between
Iran and Syria has been a key element. Second, one of the many goals behind
the U.S. invasion of Iraq was to position U.S. forces in such a way as to
change a series of relationships between Islamic countries, not the least of
which was the Iranian-Syrian relationship. Therefore, to understand what is
going on, we must look at this as a "key player" game (Syria, Iran and the
United States), with a serious of interested onlookers (Europe, China,
Russia, Israel), and a series of extremely anxious onlookers (the states on
the Arabian peninsula in particular).

The Roots of
Alliance

Let's begin with the issue of what bound the Iranians
and Syrians together. One part was ideological: Syria is ruled by a minority
of Alawites, a Shiite offshoot that is at odds with Sunni Islam. Iran, a
Shiite state, also confronts the Sunnis. Therefore, in religious terms,
Syria under the Assads had a common interest with Iran. Second, both states
were anti-Zionists. Syria, as a front-line state, confronted Israel alone
after Egypt's Anwar Sadat signed the accords at Camp David. Iran,
ideologically, saw itself as a committed enemy of Israel. Syria looked to
Iran for support against Israel, and Iran used that support to validate its
credential among other states -- Egypt, Jordan, Saudi Arabia -- that were
either collaborationist or merely symbolic in their opposition to Israel's
existence. Syria and Iran could help each other, in other words, to position
themselves both against Israel and within the Islamic world.

But
ideology was not the glue that held them together: that was Saddam Hussein.
Syria's Assad and Iraq's Saddam grew out of the same ideological soil --
that of Baath socialism, a doctrine that drew together pan-Arabism with
economies dominated by the state. But rather than forming a solid front
stretching from the Mediterranean to the Persian Gulf, the Iraqi and Syrian
brands of Baathism split into two bitterly opposed movements. That
difference had less to do with interest than with distrust between two
dynastic presidents. Syria and Iraq had few common interests and were
competing with each other economically. The relationship was, to say the
least, murderous -- if not on a national level, then on a personal one. It
never broke into open war because neither side had much to gain from a war.
It was hatred short of war.

Not so between Iraq and Iran. When Iraq
invaded Iran following the Islamic Revolution, a war lasting nearly a decade
ensued. It was a war that cost hundreds of thousands of lives -- making it,
for the size of the nations involved, one of the most brutal wars of the
20th century, and that is saying something. The issue here was fundamental.
Iran and Iraq historically were rivals for domination of the Persian Gulf.
The other countries of the Arabian Peninsula could not match either in
military strength. Thus, each had an interest in becoming the dominant
Persian Gulf power -- not only to control the oil, but to check the
political power that Saudi Arabia had as a result of oil. So long as both
were viable, the balance of power prevented domination by either. Should
either win the war, there would be no native power to resist them. Thus,
each side not only feared the other, but also had a great deal to gain
through victory.

The Iranians badly wanted the Syrians to join in
the war, creating a two-front conflict. Syria didn't. It was confronted by
Israel on the one side and Turkey, another tense rival, on the other. Should
its forces get bogged down fighting the Iraqis, the results could be
catastrophic. Besides, while the Syrians had serious issues with Iraq, their
true interests rested in Lebanon. The Syrians have always argued, with some
justification, that Lebanon was torn from Syrian territory by the
Sykes-Picot agreements between France and Britain following World War II.
Nationalism aside, the Syrian leadership had close -- indeed, intimate --
economic relationships in Lebanon. It is important to recall that when Syria
invaded Lebanon in 1975, it was in opposition to the Palestinians and in
favor of Maronite Christian families, with whom the Alawites had critical
business and political relations. It was -- and is -- impossible to think of
Lebanon except in the context of Syria.

A Delicate Web of
Relations

It was Damascus' fundamental interest for Lebanon to be
informally absorbed into a greater Syria. Damascus used many tools, many
relationships, many threats, many opportunities to weave a relationship with
Lebanon and extend Syrian influence throughout the state. One of those tools
was Hezbollah, an Islamist Shiite militia heavily funded and supported by
Iran. From the Syrian point of view, Hezbollah had many uses. For one thing,
it put a more secular Shiite group, the Amal movement under Nabih Berri, on
the defensive. For another, it helped to put the Bekaa Valley, a major
smuggling route for drugs and other commodities, under Syrian domination.
Finally, it allowed Syria to pose a surrogate threat to Israel, retaining
its anti-Zionist credentials without directly confronting Israel and
incurring the risk of retaliation.

For Iran, Hezbollah was a means
for asserting its claim on leadership of radical Islam while putting
orthodox Sunnis, like the Saudis, in an uncomfortable position. Iran was
fighting Israel via Hezbollah and building structures for a revolutionary
Islam, while the dominant Sunnis were collaborating with the supporters of
Israel, the United States. Hezbollah was, for the Iranians, a low-risk,
high-payoff investment. In addition, it opened the door for financial
benefits in the Wild West of Lebanon.

Both Iran and Syria maintained
complex relations with both the United States and Israel. For example, Syria
and Israel -- formally at war -- developed during the 1980s and 1990s complex
protocols for preventing confrontation. Neither wanted a war with the other.
The Syrians helped keep Hezbollah operations within limits and maintained
security structures in such a way that Israel did not have to wage a major
conventional war against Syria after 1982. There was far more
intelligence-sharing and business deal-making than either Jerusalem or
Damascus would want to admit. Lebanon recovered from its civil war and
prospered -- as did Syrian and Israeli businessmen.

Iran also had
complex relations with Washington. During the Iran-Iraq war, the United
States found it in its interests to maintain a balance of power between
Baghdad and Tehran. It did not want either to win. Toward this end, as Iran
weakened, the United States arranged to provide military aid to Tehran --
not surprisingly, through Israel. Israel had maintained close relations with
the Iranian military during the Shah's rule, and not really surprisingly,
those endured under the Ayatollah Khomeini as well. Khomeini wanted to
defeat Saddam Hussein more than anything. His military needed everything
from missiles to spare parts, and the United States was prepared to use
Israeli channels to supply them. It must always be remembered that the
Iran-Contra affair was not only about Central America. It was also -- and
far more significantly -- about selling weapons to Iran via the
Israelis.

Intersection: Iraq

Now, if we go back up to
50,000 feet, we will see the connecting tissue in all these relationships:
Iraq. There were plenty of side issues. But the central issue was that
everyone hated Iraq. No one wanted Iraq to get nuclear weapons. We have
always wondered about Iran's role in Israel's destruction of the Osirak
reactor in 1981; but no matter here. The point is that the containment of
Iraq was in everyone's interest. Indeed, the United States merely wanted to
contain Iraq, whereas Iran, Syria and Israel all had an interest in
destroying it.

The U.S. invasion of Iraq was in the direct interest
of two countries, in addition to the United States: Iran and Israel. Other
countries had a more ambiguous response. The Saudis, for example, were as
terrified of Iran as of Iraq. They, more than anyone, wanted to see the
balance of power maintained and viewed the American invasion as threatening
to their interests.

Syria's position was the most
complex.

Syria had joined the coalition fighting Saddam Hussein
during Desert Storm -- at least symbolically. The Syrians had complex
motives, but they did not want the United States interfering with their
interests in Lebanon and saw throwing in with the coalition as a means of
assuring a benign U.S. policy. At the same time, Syria was in the most
precarious strategic position of any country in the region. Sandwiched
between Israel, Turkey and Iraq, it lived on the lip of a volcano. The
outcome of Desert Storm was perfect for the Syrians: It castrated Iraq
without destroying it. Thus, Damascus needed to deal with only two threats:
Israel, which had grown comfortable with its position in Lebanon, and
Turkey, which was busy worrying about its Kurdish problem. In general, with
some exceptions, the 1990s were as good as it got for Syria.

The U.S.
invasion in 2003 upset the equation. Now Syria was surrounded by enemies on
all sides again, but this time one of the enemies was the United States --
and immediately at the end of conventional military operations, the United
States rushed forces to the Iraq-Syria border, threatening hot pursuit of
the fleeing Baathists. The Syrians had not calculated the American
intervention, having believed claims by Saudi Arabia and France that the
United States would not invade without their approval. Now Syria was in
trouble.

Syria and Iran: A Parallel Play

For the
Iranians, this was the golden moment. Their dream was of a pro-Iranian Iraq
-- or, alternatively, for Iraq's Shiite region to be independent and
pro-Iranian, or at least to have a neutral Iraq. The Sunni rising put the
Iranians in a perfect position: Using their influence among the Shia, they
held the cards that the Americans had dealt them. They adopted a strategy of
waiting and spinning complex webs.

The Syrians saw themselves in a
much less advantageous position. They were in their worst-case scenario.
They could not engage the United States directly, of course. But the only
satisfactory outcome to their dilemma was to divert U.S. attention from them
or, barring that, so complicate the Americans' position that they would be
prevented from making any aggressive moves toward Syria. What Damascus
needed was a strong guerrilla war to tie the Americans down.

The
Syrians hated the Iraqi Baathists, but they now had two interests in common:
First, a guerrilla war in Iraq would help to protect Syria as well as the
Baathists' interests; and second, the Iraqis were paying cash for Syrian
support -- and the Syrians like cash. They had been selling services to the
Iraqis during the run-up to the war, and once the war was over, they
continued to do so. The strategy proved rational: Syrian support for the
Sunni guerrillas and jihadists was important in bogging the Americans
down.

The Iranians liked it too. The more bogged down the Americans
were in the Sunni region, the more dependent they were on the Shia. At the
very least, they urgently needed Iraq's Shia not to rise up. At most, they
wanted the Shia to form the core of a new government. From the Iranian point
of view, the Sunni guerrillas were despicable as the enemies of Shiite Iran
and yet were the perfect tool to increase their control over the Americans.


Thus, as before, Syria and Iran were engaged in parallel play. They
shared a natural interest in a weak Iraq. If the United States was the
dominant power in Iraq, then they wanted the United States to be the weak
power. For a very long time, the United States was unable to get out of the
way of the complexities it had created. It used the Iranian Shia and then,
when trying to pull away from them, would stumble and return to dependence.
And while Iraqi and Iranian Shia are not the same by any means, in this
particular case, both had the same interest: increased leverage over the
Americans.

The United States had two possible strategies. The key to
controlling Iraq lay in ending the guerrilla war. One part of the guerrilla
war -- not all -- was in Syria. The United States could invade Syria -- not
a good idea, given available forces. It could ask Israel to do it -- which
would be a bad move politically, nor was it clear that Israel wanted to do
this. Or, it could use a strategy of indirection.

The Situation at
Hand

The thing that Syria wants more than anything is Lebanon. The
United States has set in motion policies designed to force Syria out of
Lebanon. It is not that the United States really cares who dominates Lebanon
-- in fact, its Israeli allies rather like the control that Syria has
introduced there. Nevertheless, by threatening its core interests, the
United States could, leaders thought, begin to leverage Syria.

The
Syrians were obviously not going to go quietly into that good night -- not
with billions at stake. The assassination of Rafik al-Hariri was the answer.
Even when Syria drew its overt military forces out of Lebanon, covert force
remained there perpetually. The result of the assassination, however, was
overwhelming pressure on Syria -- coupled with a not-too-convincing threat
of the use of force by the United States.

For Iran, the fate of Syria
is not a major national interest. The future of Iraq is. Iran's view of
events in Iraq is divided into three parts: First, a belief that Syria is an
important but not decisive source of support for the Sunni guerillas; second,
the view that the United States has already maneuvered itself into a de facto
alliance with a faction of Iraq's Sunnis; and finally, the belief that Iran's
interests in Iraq were not endangered by evolving politics in
Lebanon.

The most important feature of the landscape at this moment
is the decision by Iran that it is time to move toward direct discussions
with the United States. To be sure, the United States and Iran have been
talking informally for years about a variety of things, including Iraq. But
this week, the Iranian foreign minister did two things. First, he stated
that the time was not yet right for talks with the United States -- while
acknowledging that talks through intermediaries had taken place. And second,
he described the conditions under which discussions might occur. In short, he
set the stage for talks between Washington and Tehran to move into the public
eye.

It appears at this point that Iran has taken note of the U.S.
pressure against Syria and is adjusting for it. However, what is holding up
progress on public talks between the United States and Iran are not the
reasons stated by the foreign minister -- doubts about Washington's
integrity and unclarity about its goals -- but rather, the status
of the presidency in Washington. Support for President George W. Bush is
running at 39 percent in the polls. He still hasn't bounced upward, and he
still hasn't collapsed. He is balanced on the thin edge of the knife.
Indictments in the Plame
investigation might come this week, which would be pivotal. If Bush
collapses, there is no point in talks for Tehran.

Thus, the Iranians
are waiting to see two things: Does the United States really have the weight
to back the Syrians into a corner? And can Bush survive the greatest crisis
of his presidency?

The Middle East is not a simple place, but it is a
predictable one. Power talks, and you-know-what walks.

Special Report: The Bird Flu and You

Stratfor subscribers have been sending us a steady river of requests for our
opinion on the bird flu situation. Although we are not medical experts,
among our sources are those who are. And here is what we have been able to
conclude based on their input and our broader analysis of the bird flu
threat:

Calm down.

Now let us qualify that: Since December
2003, the H5N1 bird flu virus -- which has caused all the ruckus -- has been
responsible for the documented infection of 121 people, 91 one of whom caught
the virus in Vietnam. In all cases where information on the chain of
infection has been confirmed, the virus was transmitted either by repeated
close contact with fowl or via the ingestion of insufficiently cooked
chicken products. In not a single case has human-to-human communicability
been confirmed. So long as that remains the case, there is no bird flu
threat to the human population of places such as Vietnam at large, much less
the United States.




The Politics of Genetics

An uncomfortable but undeniable
fact is that there are a great many people and institutions in this world
that have a vested interest in feeding the bird flu scare. Much like the
"Y2K" bug that commanded public attention in 1999, bird flu is all you hear
about. Comparisons to the 1918 Spanish influenza have produced death toll
projections in excess of 360 million, evoking images of chaos in the
streets.

One does not qualify for funding -- whether for academic
research, medical development or contingency studies -- by postulating about
best-case scenarios. The strategy is to show up front how bad things could
get, and to scare your targeted benefactors into having you study the
problem and manufacture solutions.

This hardly means that these
people are evil, greedy or irresponsible (although, in the case of Y2K or
when a health threat shuts down agricultural trade for years, one really
tends to wonder). It simply means that fear is an effective way to spark
interest and action.

Current medical technology lacks the ability to
cure -- or even reliably vaccinate against -- highly mutable viral
infections; the best available medicines can only treat symptoms -- like
Roche's Tamiflu, which is becoming as scarce as the oftentimes legendary red
mercury -- or slow a virus' reproduction rate. Is more research needed?
Certainly. But are we on the brink of a cataclysmic outbreak? Certainly not.


A bird flu pandemic among the human population is broadly in the
same category as a meteor strike. Of course it will happen sooner or later
-- and when it does, watch out! But there is no -- absolutely no --
particular reason to fear a global flu pandemic this flu season.


This does not mean the laws of nature have changed since 1918; it simply
means there is no way to predict when an animal virus will break into the
human population in any particular year -- or even if it will at all. Yes,
H5N1 does show a propensity to mutate; and, yes, sooner or later another
domesticated animal disease will cross over into the human population (most
common human diseases have such origins). But there is no scientifically
plausible reason to expect such a crossover to be imminent.

But if
you are trying to find something to worry about, you should at least worry
about the right thing.

A virus can mutate in any host, and pound for
pound, the mutations that are of most interest to humanity are obviously
those that occur within a human host. That means that each person who
catches H5N1 due to a close encounter of the bird kind in effect becomes a
sort of laboratory that could foster a mutation and that could have
characteristics that would allow H5N1 to be communicable to other humans.
Without such a specific mutation, bird flu is a problem for turkeys, but not
for the non-turkey farmers among us.

But we are talking about a grand
total of 115 people catching the bug over the course of the past three years.
That does not exactly produce great odds for a virus -- no matter how
genetically mutable -- to evolve successfully into a human-communicable
strain. And bear in mind that the first-ever human case of H5N1 was not in
2003 but in 1997. There is not anything fundamentally new in this year's
bird flu scare.

A more likely vector, therefore, would be for H5N1
to leap into a species of animal that bears similarities to human immunology
yet lives in quarters close enough to encourage viral spread -- and lacks the
capacity to complete detailed questionnaires about family health
history.

The most likely candidate is the pig. On many farms, birds
and pigs regularly intermingle, allowing for cross-infection, and similar
pig-human biology means that pigs serving in the role as mutation incubator
are statistically more likely than the odd Vietnamese raw-chicken eater to
generate a pandemic virus.

And once the virus mutates into a form
that is pig-pig transferable, a human pandemic is only one short mutation
away. Put another way, a bird flu pandemic among birds is manageable. A bird
flu pandemic among pigs is not, and is nearly guaranteed to become a human
pandemic.

Pandemics: Past and Future

What precisely is
a pandemic? The short version is that it is an epidemic that is everywhere.
Epidemics affect large numbers of people in a relatively contained region.
Pandemics are in effect the same, but without the geographic limitations. In
1854 a cholera epidemic struck London. The European settling of the Americas
brought disease pandemics to the Native Americans that nearly eliminated
them as an ethnic classification.

In 1918 the influenza outbreak
spread in two waves. The first hit in March, and was only marginally more
dangerous than the flu outbreaks of the previous six years. But in the
trenches of war-torn France, the virus mutated into a new, more virulent
strain that swept back across the world, ultimately killing anywhere from 20
million to 100 million people. Some one in four Americans became infected --
nearly all in one horrid month in October, and some 550,000 -- about 0.5
percent of the total population -- succumbed. Playing that figure forward to
today's population, theoretically 1.6 million Americans would die. Suddenly
the fear makes a bit more sense, right?


Wrong.


There are four major differences between the 1918 scenario and any
new flu pandemic development:

First -- and this one could
actually make the death toll higher -- is the virus itself.

No one
knows how lethal H5N1 (or any animal pathogen) would be if it adapted to
human hosts. Not knowing that makes it impossible to reliably predict the
as-yet-unmutated virus' mortality rate.

At this point, the mortality
rate among infected humans is running right at about 50 percent, but that
hardly means that is what it would look like if the virus became
human-to-human communicable. Remember, the virus needs to mutate before it
is a threat to humanity -- there is no reason to expect it to mutate just
once. Also, in general, the more communicable a disease becomes the lower
its mortality rate tends to be. A virus -- like all life forms -- has a
vested interest in not wiping out its host population.

One of the
features that made the 1918 panic so unnerving is the "W" nature of the
mortality curve. For reasons unknown, the virus proved more effective than
most at killing people in the prime of their lives -- those in the 15- to
44-year-old age brackets. While there is no reason to expect the next
pandemic virus to not have such a feature, similarly there is no reason to
expect the next pandemic virus to share that feature.

Second,
1918 was not exactly a "typical" year.

World War I, while coming to a
close, was still raging. The war was unique in that it was fought largely in
trenches, among the least sanitary of human habitats. Soldiers not only
faced degrading health from their "quarters" in wartime, but even when they
were not fighting at the front they were living in barracks. Such conditions
ensured that they were: a) not in the best of health, and b) constantly
exposed to whatever airborne diseases afflicted the rest of their unit.


As such, the military circumstances and style of the war ensured that
soldiers were not only extraordinarily susceptible to catching the flu, but
also extraordinarily susceptible to dying of it. Over half of U.S. war dead
in World War I -- some 65,000 men -- were the result not of combat but of
the flu pandemic.

And it should be no surprise that in 1918,
circulation of military personnel was the leading vector for infecting
civilian populations the world over. Nevertheless, while the United States
is obviously involved in a war in 2005, it is not involved in anything close
to trench warfare, and the total percentage of the U.S. population involved
in Iraq and Afghanistan -- 0.005 percent -- is middling compared to the 2.0
percent involvement in World War I.

Third, health and nutrition
levels have radically changed in the past 87 years. Though fears of obesity
and insufficient school lunch nutrition are all the rage in the media, no
one would seriously postulate that overall American health today is in worse
shape than it was in 1918. The healthier a person is going into a sickness,
the better his or her chances are of emerging from it. Sometimes it really
is just that simple.

Indeed, a huge consideration in any modern-day
pandemic is availability of and access to medical care. Poorer people tend
to live in closer quarters and are more likely to have occupations
(military, services, construction, etc.) in which they regularly encounter
large numbers of people. According to a 1931 study of the 1918 flu pandemic
by the U.S. Public Health Service, the poor were about 20 percent to 30
percent more likely to contract the flu, and overall mortality rates of the
"well-to-do" were less than half that of the "poor" and "very
poor."

But the fourth factor, which will pull some of the
strength out of any new pandemic, is even more basic than starting health:
antibiotics. The 1918 pandemic virus was similar to the more standard
influenza virus in that the majority of those who perished died not from the
primary attack of the flu but from secondary infections -- typically bacteria
or fungal -- that triggered pneumonia. While antibiotics are hardly a silver
bullet and they are useless against viruses, they raise the simple
possibility of treatment for bacterial or fungal illnesses. Penicillin --
the first commercialized antibiotic -- was not discovered until 1929, 11
years too late to help when panic gripped the world in 1918.

Send questions or comments on this article to analysis@stratfor.com.

The Importance of the Plame Affair

By George Friedman

There are three rules concerning
political scandal in the United States. First, every administration has
scandals. Second, the party in opposition will always claim that there has
never been an administration as corrupt as the one currently occupying the
White House. Three, two is almost never true. It is going to be tough
for any government to live up to the Grant or Harding administrations for
financial corruption, or the Nixon and Lincoln administrations for political
corruption -- for instance, was Lincoln's secretary of war really preparing a
coup d'etat before the president's assassination? And sex scandals -- Clinton
is not the gold standard. Harding was having sex with his mistress in the
Oval Office -- and no discussion was possible over whether it was actually
sex. Andrew Jackson's wife was unfairly accused of being a prostitute.
Grover Cleveland had an illegitimate child. Let's not start on John F.
Kennedy.

Political scandal is the national sport -- the only
unchanging spectator activity where a fine time is had by all, save the
turkey who got caught this time. That is the fourth rule: Americans love a
good scandal, and politicians usually manage to give them one. Thus, the Tom
DeLay story is the epitome of national delight. Whether DeLay broke the law
or the Texas prosecutor who claims he did is a Democratic hack out to make a
name for himself matters little. A good time will be had by all, and in a few
years no one will remember it. Does anyone remember Bert Lance or Richard
Secord?

As we discussed in previous weeks, scandals become
geopolitically significant when they affect the ability
of the president to conduct foreign policy. That has not yet happened to
George W. Bush, but it might happen. There is, however, one maturing scandal
that interests us in its own right: the Valerie Plame affair, in which Karl Rove, the
most important adviser to the president, and I. Lewis Libby, the chief of
staff to the vice president, apparently identified Plame as a CIA agent --
or at least did not vigorously deny that she was one when they were
contacted by reporters. Given that this happened during a time of war, in
which U.S. intelligence services are at the center of the
war -- and are not as effective as the United States might wish -- the
Plame affair needs to be examined and understood in its own right. Moreover,
as an intelligence company, we have a particular interest in how intelligence
matters are handled.

The CIA is divided between the Directorate of
Intelligence, which houses the analysts, and the Directorate of Operations,
which houses the spies and the paramilitary forces. The spies are, in
general, divided into two groups. There are those with official cover and
those with non-official cover. Official cover means that the agent is
working at the U.S. embassy in some country, acting as a cultural,
agricultural or some other type of attaché, and is protected by diplomatic
immunity. They carry out a variety of espionage functions, limited by the
fact that most foreign intelligence services know who the CIA agents at the
embassy are and, frankly, assume that everyone at the embassy is an agent.
They are therefore followed, their home phones are tapped, and their maids
deliver scraps of paper to the host government. This obviously limits the
utility of these agents. Being seen with one of them automatically blows the
cover of any potential recruits.

Then there are those with
non-official cover, the NOCs. These agents are the backbone of the American
espionage system. A NOC does not have diplomatic cover. If captured, he has
no protection. Indeed, as the saying goes, if something goes wrong, the CIA
will deny it has ever heard of him. A NOC is under constant pressure when he
is needed by the government and is on his own when things go wrong. That is
understood going in by all NOCs.

NOCs come into the program in
different ways. Typically, they are recruited at an early age and shaped for
the role they are going to play. Some may be tracked to follow China, and
trained to be bankers based in Hong Kong. Others might work for an American
engineering firm doing work in the Andes. Sometimes companies work with the
CIA, knowingly permitting an agent to become an employee. In other
circumstances, agents apply for and get jobs in foreign companies and work
their way up the ladder, switching jobs as they go, moving closer and closer
to a position of knowing the people who know what there is to know. Sometimes
they receive financing to open a business in some foreign country, where over
the course of their lives, they come to know and be trusted by more and more
people. Ideally, the connection of these people to the U.S. intelligence
apparatus is invisible. Or, if they can't be invisible due to something in
their past and they still have to be used as NOCs, they develop an
explanation for what they are doing that is so plausible that the idea that
they are working for the CIA is dismissed or regarded as completely unlikely
because it is so obvious. The complexity of the game is endless.

These
are the true covert operatives of the intelligence world. Embassy personnel
might recruit a foreign agent through bribes or blackmail. But at some
point, they must sit across from the recruit and show their cards: "I'm from
the CIA and…." At that point, they are in the hands of the recruit. A NOC may
never once need to do this. He may take decades building up trusting
relationships with intelligence sources in which the source never once
suspects that he is speaking to the CIA, and the NOC never once gives a hint
as to who he actually is.

It is an extraordinary life. On the one
hand, NOCs may live well. The Number Two at a Latin American bank cannot be
effective living on a U.S. government salary. NOCs get to live the role and
frequently, as they climb higher in the target society, they live the good
life. On the other hand, their real lives are a mystery to everyone.
Frequently, their parents don't know what they really do, nor do their own
children -- for their safety and the safety of the mission. The NOC may
marry someone who cannot know who they really are. Sometimes they themselves
forget who they are: It is an occupational disease and a form of madness.
Being the best friend of a man whom you despise, and doing it for 20 years,
is not easy. Some NOCs are recruited in mid-life and in mid-career. They
spend less time in the madness, but they are less prepared for it as well.
NOCs enter and leave the program in different ways -- sometimes under their
real names, sometimes under completely fabricated ones. They share one
thing: They live a lie on behalf of their country.

The NOCs are the
backbone of American intelligence and the ones who operate the best sources
-- sources who don't know they are sources. When the CIA says that it needs
five to 10 years to rebuild its network, what it is really saying is that it
needs five to 10 years to recruit, deploy and begin to exploit its NOCs. The
problem is not recruiting them -- the life sounds cool for many recent
college graduates. The crisis of the NOC occurs when he approaches the most
valuable years of service, in his late 30s or so. What sounded neat at 22
rapidly becomes a mind-shattering nightmare when their two lives collide at
40.

There is an explicit and implicit contract between the United
States and its NOCs. It has many parts, but there is one fundamental part: A
NOC will never reveal that he is or was a NOC without special permission.
When he does reveal it, he never gives specifics. The government also makes
a guarantee -- it will never reveal the identity of a NOC under any
circumstances and, in fact, will do everything to protect it. If you have
lied to your closest friends for 30 years about who you are and why you talk
to them, no government bureaucrat has the right to reveal your identity for
you. Imagine if you had never told your children -- and never planned to
tell your children -- that you worked for the CIA, and they suddenly read in
the New York Times that you were someone other than they thought you
were.

There is more to this. When it is revealed that you were a NOC,
foreign intelligence services begin combing back over your life, examining
every relationship you had. Anyone you came into contact with becomes
suspect. Sometimes, in some countries, becoming suspect can cost you your
life. Revealing the identity of a NOC can be a matter of life and death --
frequently, of people no one has ever heard of or will ever hear of
again.

In short, a NOC owes things to his country, and his country
owes things to the NOC. We have no idea what Valerie Plame told her family
or friends about her work. It may be that she herself broke the rules,
revealing that she once worked as a NOC. We can't know that, because we
don't know whether she received authorization from the CIA to say things
after her own identity was blown by others. She might have been
irresponsible, or she might have engaged in damage control. We just don't
know.

What we do know is this. In the course of events, reporters
contacted two senior officials in the White House -- Rove and Libby. Under
the least-damaging scenario we have heard, the reporters already knew that
Plame had worked as a NOC. Rove and Libby, at this point, were obligated to
say, at the very least, that they could neither confirm nor deny the report.
In fact, their duty would have been quite a bit more: Their job was to lie
like crazy to mislead the reporters. Rove and Libby had top security
clearances and were senior White House officials. It was their sworn duty,
undertaken when they accepted their security clearance, to build a
"bodyguard of lies" -- in Churchill's phrase -- around the truth concerning
U.S. intelligence capabilities.

Some would argue that if the
reporters already knew her identity, the cat was out of the bag and Rove and
Libby did nothing wrong. Others would argue that if Plame or her husband had
publicly stated that she was a NOC, Rove and Libby were freed from their
obligation. But the fact is that legally and ethically, nothing relieves
them of the obligation to say nothing and attempt to deflect the inquiry.
This is not about Valerie Plame, her husband or Time Magazine. The
obligation exists for the uncounted number of NOCs still out in the field.


Americans stay safe because of NOCs. They are the first line of
defense. If the system works, they will be friends with Saudi citizens who
are financing al Qaeda. The NOC system was said to have been badly handled
under the Clinton administration -- this is the lack of humint that has been
discussed since the 9-11 attacks. The United States paid for that. And that
is what makes the Rove-Libby leak so stunning. The obligation they had was
not only to Plame, but to every other NOC leading a double life who is in
potentially grave danger.

Imagine, if you will, working in Damascus
as a NOC and reading that the president's chief adviser had confirmed the
identity of a NOC. As you push into middle age, wondering what happened to
your life, the sudden realization that your own government threatens your
safety might convince you to resign and go home. That would cost the United
States an agent it had spent decades developing. You don't just pop a new
agent in his place. That NOC's resignation could leave the United States
blind at a critical moment in a key place. Should it turn out that Rove and
Libby not only failed to protect Plame's identity but deliberately leaked
it, it would be a blow to the heart of U.S. intelligence. If just one
critical NOC pulled out and the United States went blind in one location,
the damage could be substantial. At the very least, it is a risk the United
States should not have to incur.

The New York Times and Time Magazine
have defended not only the decision to publish Plame's name, but also have
defended hiding the identity of those who told them her name. Their
justification is the First Amendment. We will grant that they had the right
to publish statements concerning Plame's role in U.S. intelligence; we
cannot grant that they had an obligation to publish it. There is a huge gap
between the right to publish and a requirement to publish. The concept of
the public's right to know is a shield that can be used by the press to hide
irresponsibility. An article on the NOC program conceivably might have been
in the public interest, but it is hard to imagine how identifying a
particular person as part of that program can be deemed as essential to an
informed public.

But even if we regard the press as unethical by our
standards, their actions were not illegal. On the other hand, if Rove and
Libby even mentioned the name of Valerie Plame in the context of being a CIA
employee -- NOC or not -- on an unsecured line to a person without a security
clearance or need to know, while the nation was waging war, that is the end
of the story. It really doesn't matter why or whether there was a plan or
anything. The minimal story -- that they talked about Plame with a reporter
-- is the end of the matter.

We can think of only one possible
justification for this action: That it was done on the order of the
president. The president has the authority to suspend or change security
regulations if required by the national interest. The Plame affair would be
cleared up if it turns out Rove and Libby were ordered to act as they did by
the president. Perhaps the president is prevented by circumstances from
coming forward and lifting the burden from Rove and Libby. If that is the
case, it could cost him his right-hand man. But absent that explanation, it
is difficult to justify the actions that were taken.

Ultimately, the
Plame affair points to a fundamental problem in intelligence. As those who
have been in the field have told us, the biggest fear is that someone back
in the home office will bring the operation down. Sometimes it will be a
matter of state: sacrificing a knight for advantage on the chessboard.
Sometimes it is a parochial political battle back home. Sometimes it is
carelessness, stupidity or cruelty. This is when people die and lives are
destroyed. But the real damage, if it happens often enough or no one seems
to care, will be to the intelligence system. If the agent determines that
his well-being is not a centerpiece of government policy, he won't remain an
agent long.

On a personal note, let me say this: one of the
criticisms conservatives have of liberals is that they do not understand
that we live in a dangerous world and, therefore, that they underestimate
the effort needed to ensure national security. Liberals have questioned the
utility and morality of espionage. Conservatives have been champions of
national security and of the United States' overt and covert capabilities.
Conservatives have condemned the atrophy of American intelligence
capabilities. Whether the special prosecutor indicts or exonerates Rove and
Libby legally doesn't matter. Valerie Plame was a soldier in service to the
United States, unprotected by uniform or diplomatic immunity. I have no idea
whether she served well or poorly, or violated regulations later. But she did
serve. And thus, she and all the other NOCs were owed far more -- especially
by a conservative administration -- than they got.

Even if that debt
wasn't owed to Plame, it remains in place for all the other spooks standing
guard in dangerous places.

Send questions or comments on this article to
analysis@stratfor.com.

Iraq, the Constitution and the Fate of a President

By George Friedman

The elections scheduled in Iraq for Dec. 15
have generated what is becoming a permanent feature of Iraqi politics. The
process of establishing a constitution has become the battleground among the
three major ethnic factions over the nature of political arrangements in
Iraq, the distribution of power, the character of the regime and, of course,
how oil revenues will be shared. Each milestone on the road to a constitution
has become an occasion for intensifying both the negotiating and military
process, with no milestone becoming definitive. Thus, the Oct. 15 referendum
will give way to December's general elections, and today's negotiations set
the stage for the next round of negotiations.

All of this can be
taken two ways. One way to view it is that the Iraqi situation is
fundamentally insoluble, that the various parties cannot achieve a permanent
resolution to the problem. Another way of looking at it is that this process
is the permanent solution: Iraq will be an endless reshuffling of a
finite political deck, with no end in sight. There are other countries that
live this way, and the solution is that they muddle through: politics and
the state are devalued, while the rest of society -- clans, families,
corporations, organized crime -- are emphasized. An Iraq with eternally
shifting politics is not incompatible with the notion of a functioning
society.

This assessment, of course, ignores a number of things.
First, Iraq is occupied by U.S. troops. Second, there is a war going on in
which the Sunnis are fighting the occupation. The Iranians are in the wings
-- actually, on the stage -- trying to dominate Iraq as much as possible. A
border war is raging along the Syrian frontier. A broader war involving the
United States and jihadists is still sputtering along. Therefore, any hope
has to be viewed through the prism of this violence, and the question is
simple: can the emerging political process ultimately reduce -- "eliminate"
is too much to ask -- the level of violence? Put another way, from the U.S.
side, can the present political process solve the problems of occupation
while yielding the political goals Washington wanted? From the jihadist
side, can the uncertainty of the political process be exploited to create
the conditions for what Ayman al-Zawahiri described in a recent letter: the
jihadist domination of Iraq? Or, will the conflict between political goals
undermine the process and create permanent war instead of permanent
instability?

The core difference between this milestone and the last
-- the generation of a proposed constitution for consideration by the
legislature and, through this referendum, the public -- is that, whereas the
last round of negotiations ended in an inability of the Shia and Kurds to
reach an agreement with the Sunnis, this one has ended in an agreement of
sorts. That agreement frames the situation, inasmuch as it is less an
agreement than a framework for ongoing negotiations.

Some Sunni
leaders have opposed any agreement or participation in the constitutional
referendum; others have supported participation with a "no" vote. What
appears to have been crafted between the Shia and negotiating Sunni groups
is this:

• If the constitution is approved, it will be a
  temporary, not permanent, constitution.


• After a general election
  on Dec. 15 that would be based on this constitution, a committee of the
  National Assembly would review the document once again.


• The new
  parliament would have four months to complete changes to the document.
  


• A new vote would be held to ratify that final
  constitution.

In other words, the agreement that has been
reached here between the Sunnis, Shia and Kurds is simply that all sides
will focus on the constitutional negotiations.

That's not a bad
deal, if the negotiations can encompass a large enough spectrum of each
group's leadership and if everyone agrees to put other issues on hold. You
can spend a lot of time debating the rules under which you will debate the
issues, and you can defuse other issues if that is what everyone wants to
do. The problem here is that it is not clear that this is what everyone
wants.

A major Sunni organization -- the Iraqi Islamic Party -- has
agreed to these rules. Other groups, at least as or more important than the
Iraqi Islamic Party, have not. Neither the Association of Muslim Scholars
nor the Iraqi General Conference appear at this moment to have changed their
position, which is that Sunni voters should reject the new constitution. That
in itself is not as alarming as it appears. The Sunnis, and other factions,
are represented by several groups, and these groups sometimes play "good
cop, bad cop" very effectively. The signal the Sunnis are giving is that
they are not rejecting the constitutional process out of hand, but that they
will need serious coaxing before the vote comes about. They are taking it
down to the wire, which is the rational thing to do under the
circumstances.

Three serious pressures are converging on the Sunnis.
First, simply refraining from participating in the Oct. 15 referendum could
free the Shia and Kurds to set up a regional federal system that would leave
the Sunnis as the weakest player -- and the one with least access to future
oil revenues. At the same time, the traditional Sunni leadership, deeply
complicit in the Baath dictatorship, has substantial reason to fear the
jihadists. The jihadists are not part of the traditional leadership and are,
in fact, ideological enemies of Baathism. If the jihadists grow in strength,
the traditional leadership might find itself displaced by them over time. On
the other hand, agreeing to participate in the country's political process
would open the Sunni leadership up to charges of being, not only lackeys of
the United States, but also stooges to the hated Shia. More than any other
group in Iraq, the Sunnis need for the jihadists to be defeated. On the
other hand, they know they can't count on the Americans to deliver this
defeat. They are under pressure to find a political solution, but also under
powerful pressure not to find one. So, they churn around, generally heading
toward a solution but never quite getting there.

The position of the
Shia is simpler, and they have more ways of winning. If the constitution
leads to a simple federalist government, the Shia will dominate southern
Iraq and can deal with the Sunnis at their leisure. If a centralized
government is created, the Shia will be -- with the Kurds -- the majority.
The only thing the Shia can't live with is the one thing the Sunnis want: a
constitution so contrived that the Sunnis can block major initiatives by the
Shia.

The Kurds can live with a lot of solutions and can create
informal realities based on geography and their own military strength and
American backing. Their interest is less institutional than geopolitical --
they want Mosul and Kirkuk. More precisely, they want to dominate the
northern oil fields and trade, and to exclude the Sunnis as far as possible
from these interests. Whether that is accomplished through constitutional or
business means is of less interest to them than that it be done.

The
form of the constitution, therefore, matters most to the Sunnis. They need
it to be written a certain way, and then to have guarantees that its
provisions will be respected. At the moment, this coincides with the
American interest. A radical federalism that creates a de facto Shiite state
in the south is not at all in the American interest: It would have the
potential to expand Iranian power in ways far more significant that a
nuclear weapons program, by bringing a Shiite force -- perhaps Iraqi, or
perhaps Iraqi and Iranian -- to the borders of Kuwait and Saudi Arabia. The
specter of a Shiite force inciting Shiite populations in Kuwait and Saudi
Arabia has always been a fear, but the possibility of the Iranian army
taking up positions on the frontier would change the balance of power in the
region decisively.

The countries in the Saudi peninsula are no match
for the Iranians. Add in the Syrians, who long have been allies of sorts to
Iran, and you get a situation in which the United States would have to
retain a presence in order to protect the regional balance of power. The
Saudis do not want U.S. forces in the kingdom, to say the least, and the
United States does not want to be there -- it would generate even more
jihadist threats. Therefore, Washington does not want to see the federal
solutions favoring the Shia come into being, nor does it want to see a
centralized government dominated by the Shia. Having used the Shia to
contain the insurrection in the Sunni regions, the United States now finds
itself aligned with the Sunnis and with the former Baath Party.

These
things happen in war and geopolitics. But there are two problems here. First,
the United States has made it very clear that it will be withdrawing its
forces -- at least some of them -- from Iraq in 2006. Second, everyone reads
U.S. polls. President George W. Bush is in political trouble in the United
States and, now, within the Republican Party itself. As with Nixon and Ford
found in Vietnam, following Watergate, the threat posed by the United States
declines as the president's political weakness grows. And with the decline of
the U.S. military threat, there is a decline of U.S. influence. Last week's
discussion of air strikes inside Syria -- and the leak that Secretary of
State Condoleezza Rice opposed such strikes -- is an example of the problem.
Where the administration had had credibility for action before, that
credibility has now decreased.

The administration's political
weakness does not seem to be reversing. Should Karl Rove be indicted in the
Valerie Plame affair -- and at the moment, the rumors in Washington say that
he will be -- the president will have lost his chief aide, and the
administration will have been struck another
blow.

At this moment, it is possible to make the constitutional
process into a container for diverse Iraqi interests. It is also possible to
see a point where the Sunni Baathists would turn on the jihadists in order to
protect their political position. But all of this hinges on the guarantees
that are provided by each side, and the ability and willingness of the
United States to compel compliance with those guarantees. The paradox is
that the most likely path to a successful withdrawal from Iraq is the
perception that the United States is going to stay there forever -- and can
do it. But as Bush weakens in Washington, the ability of various Iraqi
factions to rely on U.S. guarantees declines.

Geopolitics teaches the
interconnectedness of events. The current American strategy requires
sufficient stability to be generated in Iraq to permit a U.S. military
withdrawal. That requires that the United States must be taken seriously as
a military force. But the weaker Bush is -- for whatever reason, fair or not
-- the less credible becomes his pledge to stay the course. There are few
parallels between Iraq and Vietnam save this: the political climate in
Washington determines the seriousness with which American power is taken on
the battlefield.

It would seem, then, that Bush has two problems.
The first is whether he can stabilize and increase his power in the United
States. The second is whether he can extract a clear strategy from the
complexity of Iraq. The answer to the second question rests in the answer to
the first. At the moment, the Iraqi constitutional talks seem to be saying,
"Bush is not broken, but we aren't committing to anything until we see the
polls in December."

New York City Bomb Tip

The New York City Police Department on Oct. 6 is investigating what it has
said is a credible tip that 19 operatives were deployed to New York City to
place bombs in subways. Security in the subways has been increased. Police
are urging the public not to be alarmed because though the source is
credible the information reportedly has not been verified. Police were
reported mobilizing at the Brooklyn naval yard.

Send questions or comments on this article to analysis@stratfor.com

The Economy: Doubts on the Horizon

By Peter Zeihan

Economists are second only to political
scientists in their ability to dream up models and frameworks by which to
measure and predict events. At Stratfor, we pay attention to many types of
economic models but rely on none of them exclusively: The U.S. economy, let
alone the global economy, is a beast that marches to its own tune. Economic
forecasting is a bit of an art, particularly because growing access to
capital and technology not only blurs the rules on which economies once ran,
but also greatly shortens the time necessary for economies to react to
stimuli.

The U.S. Economy: Debtors and Deficit Spending


Though it might not be obvious from watching the mainstream print and
broadcast media, which have been issuing bearish reports since long before
Hurricane Katrina, the U.S. economy remains red hot at the moment. For the
past nine quarters, it has expanded by more than 3 percent per quarter, the
fastest sustained growth since 1984-1986. Moreover, U.S. growth has been
steady and stable in the longer run as well. The recessions in 1990-1991 and
2001 were the shortest and mildest in American history, and in reality
amounted to only small corrections -- made necessary by the United States'
no-holds-barred adoption of rafts of computer and information technology.
One would have to go back to the 1980-82 period and a pair of back-to-back
recessions to find the last time dispassionate observers felt the United
States had serious economic difficulties.



The
"secrets" behind strong and sustained U.S. growth are three-fold.

1.
Capital is allocated on the basis of economic efficiency, not political
prerogatives. By way of comparison, capital allocation patterns in Asia are
extremely politicized, with government granting -- or directing the
disbursement of -- cheap loans to companies owned by or linked to the state.
That may generate faster growth rates, but it often is not profitable and
also renders companies dependent upon ongoing infusions of cheap capital,
particularly in times of economic distress.

2. Second, capital
allocation patterns encourage the heavy use of technology. If capital is
treated as a scarce resource, rates of return need to be as high as possible
and productivity becomes key. The regular application of technology is by far
the best way to improve both quality and output.

3. Finally, there is
the United States' culture of change. Unlike the Japanese or Europeans,
people in the United States people do not hold their jobs in perpetuity: On
average, they change careers -- not just jobs -- seven times during their
lives. There also is a culture of corporate Darwinism: Unsuccessful
companies are allowed to die off instead of becoming black holes that siphon
capital away from more efficient competitors. The embrace of technology also
plays into such shifts and changes, occasionally eliminating entire sectors
in favor of new ones and necessitating a constant turnover in terms of
companies, skill sets and personnel alike.

The result has been
diversification, resiliency and dynamism. No wonder that -- in terms of
economic growth -- the United States recovered from
the Sept. 11 attacks less than six weeks after they took place.

That
said, "resilient" does not mean "invulnerable," and "dynamic" is not
synonymous with "eternally progressive." The United States does suffer from
some very real problems, and the twin trade and budget deficits -- which
have radically expanded in terms of both absolute and relative size -- are
not exactly fresh news.

We are not overly concerned about the trade
deficit, since that represents the balance of imports versus exports, and
not actually money that the United States owes anyone (government bonds
restrict creditors' actions more than they do borrowers'). It is primarily
an issue of financing -- foreigners will continue to finance the U.S. trade
deficit so long as the rate of return in the United States is higher than it
is at home -- and purchasing power.

Many fret about U.S. purchasing
power because most economic models report the U.S. savings rate is negative,
suggesting a collision course with bankruptcy. However, while mortgage debt
is included in savings rate calculations, the equity from home ownership is
not. The result is that American consumers -- who are more likely than their
foreign counterparts to be homeowners -- count a massive debt into their
savings rates, but do not factor in what is typically their greatest asset.
Don't let the three-car garages and a cell phone in every pocket fool you: A
detailed balance sheet indicates that most Americans are inveterate investors
-- not negligent spendthrifts.




The same, however, cannot be said of the government.

Under the
Bush administration, the extremely atypical budget surplus that rose up
during the second Clinton administration has evaporated, and the United
States is engaged in a spree of deficit spending that would be illegal under
European monetary rules. While any number of events potentially could whittle
this number down, the expansion of some entitlement programs, the war in Iraq
and radically increased defense and security spending due to post-Sept. 11
politics have given this deficit a lot of staying power.

Deficit
spending can be a dangerous game. Typically, it should be used only to
kick-start growth during times of recession. Sustained deficit spending not
only draws capital away from the typically more efficient private sector,
but also leaves the broader economy addicted to government-administered
stimuli. Woe to the economy that undergoes a recession in such
circumstances: that means that one of the few tools left to the government
is even more deficit spending. Japan faced just such a circumstance
in the 1990s; it now carries a national debt in excess of $6 trillion and a
sustained budget deficit of more than 6.5 percent of GDP -- and that is
before any debt rollovers are taken into account.

One of the few
bright spots in the budget deficit picture is that the debt is cheap to
maintain. The wide differential between U.S. interest rates (currently at
3.75 percent) -- and those in Europe (2.0 percent) and Japan (0.0 percent)
makes investments in the United States appear more attractive than other
destinations. That has sent a flood of foreign money into American debt
markets, helping to keep financing cheap for the government and private
citizens alike.

Because of all this, the budget deficit is not
ideal, but current levels of strong economic growth and international
financing make it tolerable. So long as growth remains relatively robust, a
large budget deficit may be slightly worrisome, but it is ultimately an
issue that the United States has plenty of time to address.

Or is
it?

After Katrina

The impact of Hurricane Katrina on
the U.S. economy was hardly passing. Total cleanup and recovery costs have
been estimated between $200 billion and $300 billion, and that does not
include the cost of perhaps repositioning New Orleans in a location on the
safer side of sea level. Government entities currently expect the overall
impact to be relatively mild, chipping about 0.5 percent from U.S. growth in
the third and fourth quarters.

We are concerned about three specific
effects of Katrina.

First, the U.S. federal budget was already deep
into the red when the hurricane struck. Adding another $200 billion of fresh
deficit spending, on top of current policies, is not going to improve the
bottom line in the near future. The need for credit in the impacted regions
is already massive, and with the government -- unavoidably, we must note --
now diving even deeper into the red to fund the recovery and reconstruction,
the cost of credit can only rise, retarding growth.

Second, Katrina
damaged the Bush presidency.

We normally do not concern ourselves
overmuch with the ebb and flow of presidential approval polls -- President
Bill Clinton's term in office is sufficient testament as to the ability of
how even a divisive and besieged leader can continue to lead. However,
Katrina may have changed the calculus for the Bush administration, by
stripping away the support of the political middle and pushing his back to
the wall in the approval polls. The president's hard-core supporters
were, immediately following the hurricane, the only ones left in his camp --
and should that base of support begin to crack, his run as a president who
can do more than merely preside would effectively come to an end, with very
real implications for U.S. foreign policy quickly following.

There
are plenty of opportunities for such cracks to appear, even if the Katrina
recovery is textbook perfect. Tom Delay, a firm Congressional ally, is now
facing money-laundering charges in Texas. Karl Rove, the president's
political strategist, stands accused of violating national secrecy laws. The
nomination of White House counsel Harriet Miers to the Supreme Court might
mollify centrists and liberals in Congress and help the president woo the
U.S. political center, but Bush could well forfeit the endorsement of some
bedrock supporters, who demand a more conservative nominee. And of course
let us not forget the Iraq war, the quintessential vote-killer.

In
the face of a national disaster a president needs to project the image of
being larger than life in order to engender confidence. That is a quality
that the Bush administration held in spades after the Sept. 11 attacks. But
at present, respect for the president is difficult to find. The apparent
lack of confidence in the government is echoed in a level of business
confidence that borders on narcoleptic. These are not attitudes that make
people want to go out and spend money, no matter how loudly the "employee
discount" automobile ads may blare.

Third, there are signs that
Katrina has done what the Sept. 11 attacks and the Iraq war failed to do:
stymie U.S. economic demand. The figures on this point are extremely
preliminary, but they are worrying nonetheless: Hurricanes Katrina and Rita
at one point managed to shut off all oil production from the U.S. sector of
the Gulf of Mexico, as well as 80 percent of normal natural gas output. As
of Oct. 4, 90 percent of crude production remains offline, along with 45
percent of natural gas. So far, the storms have denied the U.S. market of
approximately 50 million barrels of crude oil and a quarter-trillion cubic
feet of natural gas.

Refining has been similarly affected. At the
storms' height, some 4.7 million bpd of refining throughput was offline, and
some 2.2 million bpd remains so today.

Yet despite the massive
shutdowns in both production and refining, crude oil stocks have dropped by
less than 1 percent from pre-Katrina levels. Far more noteworthy is the fact
that while gasoline production at one point was down a full 2 million bpd per
day, and some 4.2 million people have evacuated from -- and most of them
since returned to -- the hurricane zones, U.S. gasoline inventories have
actually risen by more than 5 percent. Put another way, U.S. energy demand
-- at least as far as gasoline is concerned -- has dropped.


Americans are not quick to cut back on gasoline consumption if they can
help it. The last time that occurred was in the aftermath of the 1979
Iranian revolution; the result was an energy-induced recession.

It
is possible that the United States once again might find itself on the cusp
of such a phenomenon.

Recession Dawning?

Let's
approach this from another angle.

One of the more reliable means of
predicting a recession is to chart the payoff of bonds of different
maturities, often referred to as the "yield curve." Short-duration bonds pay
out very little, while longer-duration debt instruments generally provide a
larger payout because they represent a higher level of risk. A healthy yield
curve (the red line, in the chart below) reflects that.



When
a recession dawns, businesses tend to react by locking in as much cheap
credit as they can. That quickly forces the short end of the yield curve up,
causing the curve to invert (the yellow line). Congratulations. You are now
in recession.

The United States has not had an inverted curve --
which, bear in mind, is a very forward-looking indicator -- since the peak
of the dot-com bubble in 2000. At that point, frothy over-optimism for
companies such as petpsychotherapy.com led to an inverted yield curve,
followed by a stock market fall-off and then a recession. On average, the
time passed from yield curve shift to stock market reaction is about three
months, with recession following another three to six months after that. In
this example, the recession began in March 2001.

As of this writing,
the United States does not yet have an inverted yield curve -- and it is not
a given that one will materialize -- but we do note that the curve has been
flattening for the better part of a year; the gap between short- and
long-term yields is only about one-tenth as large as it was a year ago. If
the yield curve inverts in the next couple of months, the United States
likely would be eyeing a recession at some point in the first half of
2006.

But the real kicker at the moment is not gasoline demand or
the yield curve. If the United States fell into recession in the current
environment, levels of deficit spending are already so high that there is
not a great deal of room to maneuver on budgetary matters without risking a
Japanese-style
economic malaise. That means that the responsibility for jolting the
economy out of recession would fall to the Federal Reserve Board -- which,
without much fresh cash from the government to stimulate demand, would need
to maneuver monetary policy extremely adroitly.

At that point,
attention normally would turn to Federal Reserve Chairman Alan Greenspan,
who has adroitly manipulated policy throughout practically all of the
1982-2005 U.S. expansion. But here again, there is a new question looming:
Greenspan is leaving the Federal Reserve in January 2006, and he does not
yet have a clear successor -- and certainly no one waiting in the wings to
equal his track record. The country must face whatever turmoil is ahead
without a trusted hand at the wheel.

It is interesting to note that,
despite his career-long habit of staying out of the United States'
internecine political debates, Greenspan has, in the past year, developed a
propensity to speak his mind (albeit in extremely couched terms). In most
instances, such discussions involve pontification about the problems that
his successor will face. These range from the budget deficit, to the
instability in the housing market, to the touchy, vote-losing issue of
unsustainable Social Security payments.

The common theme winding
through these discussions is simple and striking: the United States is
living dangerously. Freddie Mac and Fannie Mae, the two quasi-state mortgage
mega-firms, have almost totally crowded competition out of a $5.5 trillion
debt market -- raising the prospects that the potential fall of only two
companies could crash the entire country's financial structure. The
country's Social Security outlays, as currently envisioned, will bankrupt
not just the pension system, but the total budget within a generation. And
of course, the budget deficit vastly reduces the United States' room to
maneuver.

It is not going to get any easier. The baby boomer
generation is in the process of retiring -- a trend that will peak in about
eight years. Since Generation X is so much smaller than the boomer
generation, the net payments into the Social Security accounts will not be
sufficient to keep the U.S. budget viable. The U.S. budget picture is as
good as it is going to get until a generation younger and more numerous than
Generation X matures -- meaning when the children of today's 20-somethings
finish college.

Ultimately, U.S. military, cultural and political
power is based on the breadth, depth and stability of the U.S. economy.
Money breeds power and influence, attracts the best of the world's minds and
allows the country to buy useful things, like aircraft carrier battle groups.
Should current trends continue for a few more years, structural factors will
force interest rates to rise, the economy will chronically weaken, and
something will have to give.

In the early months of 2006, the United
States may get a very small taste of what is to come.

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