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So America is at war. For quite some time, it appears. And the primary battlefield may well be financial. If so, there seem to be some interesting strategic approaches that America should employ, given its current position. What is that position? Well, dominant military hyper-power. And dominant financial hyper-power? Well, dominant in the issuance of debt and its closest cousin, the Federal Reserve note. The world's reserve currency.

The Next Battle is Engaged
So who are the enemies? By tipping their positions so clearly, the Retro-Socialists surely thought that the alignment of their welfare state with the Islamic radical would compromise America's hegemony. Not so far, and this position has weakened considerably with the military outcome in Iraq. Now, the decline in the US dollar is a step into the battle field of competitive currency devaluation.

But can't the "enemy" just devalue more? Well, the Euros link to gold might have a short term disadvantage. And be more difficult to devalue. So the primary enemy in this battle is the Euro, with gold as a radical ally. With the gold dinar the Islamic extremist in the mix. The retro-Socialist alliance remains intact, and prepares its counter attack. But the outcome is as certain as the battle in Iraq. On a war footing the US may inject dollars subversively in unknown manner. So why is the socialist alliance not likely to prevail in a game of competitive currency devaluation? With Bernanke as a mad Keynesian door gunner in a black helicopter, firing his printing press with abandon, I doubt it.

This would make sense in the context of the need to reflate the American economy. Export the deflation. The ideal outcome for America would be for the US Dollar to drop relative to gold, and for the Euro to rise relative to gold. This would keep any gold bull largely contained to the US Dollar, with moderated accumulation by those with a Jacksonian mindset. Should work quite well. Tricky and indelicate at times as many, such as China, are unfriendly to America and have US dollar reserves that could tip the balance. But tipping the balance would cause serious blow-back. So this is do-able.

And a perfect set up for imploding derivatives.

Damage Control
I love Warren Buffet's under-statements: Derivatives are weapons of mass destruction. There has been profuse digression on Buffets remark since he made the comment a few months ago. Mostly predicting various perverse uncontrolled melt downs. And now, even Greenspan's most recent statements, while defending derivatives and the status quo, in a hint of subversive commentary, seem to indicate agreement, but only where derivative risk is concentrated. It is important to note that Greenspan says derivatives have become instruments of stability: Read control. Control not likely to dissolve in a single discontinuous event.

When weapons are scattered about, it can be debilitating to the infrastructure if they explode all at once. But if they are carefully gathered up and carefully piled in discrete places, the damage can be contained. Or directed toward the enemy within as well as without. All in a controlled fashion, or as controlled as war allows. Just keep errant rockets and civilians away.

So by herding all these convoluted bad debt instruments into a modest selection of entities you can detonate the bulk of these weapons without damaging the remaining institutions. Expect at some time a controlled sequence of detonations at the House of Morgan, Fannie Mae, and others deemed less worthy by the fundamentals of the long cycle. Those less worthy by virtue of their reliance on socialist Keynesian thinking as evidenced by their risk structure. It is no coincidence that these have been good shorts for astute bears with staying power.

Of course, we can't keep all the civilians away from Fannie Mae and her relatives. Thus there will probably be monetization of mortgage debt, but only to the extent that is needed to placate the masses. So there will be some collateral damage at the shallow end of the gene pool. Remember, gold settles in the deeper portions of the pool. Stay in the deep end by hedging your real estate debt with gold.

So the declining dollar, properly orchestrated, can systematically rid the world of these terrible weapons of mass destruction. And the derivatives melt down may well rid America of the burden of liability saddled by socialist Keynesian machinations.

Weapons of Ultimate Destruction
But more interesting is the foreshadowing offered by financial events in Iraq. Critics of the administration are wailing: No Weapons of Mass Destruction have been found. But this is perplexing. I have been watching our troops in Iraq open large metal boxes filled with neatly stacked and wrapped WMD. After all, the US dollar is the ultimate derivative.

So it is interesting to note that the IMF is being herded into the increasingly impotent United Nations. And the oil is flowing, creating a flow of US dollars into Iraq. The oil for dollar trade is still overwhelming the Euro and it radical ally. The dinar will remain a bit player; the gold for oil scenario is not likely. At least until the game ends.

Perhaps, just perhaps, all of our enemies' strongholds have been infiltrated with these weapons of ultimate destruction. A few dirty nukes, or for that matter hot nukes, might cause less damage upon detonation than will the dollar.

So what of America's monstrous debt load? But those debts are in dollars, which we can print to pay off the debt. Even better, we can use cheaper dollars. Until they are worthless. Default, by default. And will the bizarre mixture of gold swaps and other derivatives be salvaged from the smoldering ashes of a derivatives meltdown? Hardly. No more than Iraq will be forced to honor the old regime's debts to the Retro-Socialists. No wonder the Swiss and others holding paper against physical gold in the hands of the US Treasury have been recently nervous. In the end game, possession is everything.

Add to this mix a trump card, or maybe a joker: deep storage gold. The amount of this gold is limited only by our imagination. After all we have confidence in the Treasury, not even requiring an audit for decades. No reason for change, especially now. Especially during war.

And notice that Bush is now pushing a third term for Greenspan. Is Greenspan's new Jacksonian line of thought being held in reserve? Is the Keynesian rhetoric just a front? Or are these advocates just useful idiots. Do I detect strategery in play? Is reflate and default, or refault, the latest strategery? Or is this an organic process by which compensatory mechanisms will mitigate the doom and gloom scenario envisioned by most Austrian economists?

While it is useful to think in terms of conscious action and strategic thinking, I tend toward that later view. As an Austrian economist myself, I view the process as inevitable. But I also have great faith that the foundation of the American Federal Republic will endure. Amongst the corruption, wise and honest men will rise to lead. And the masses will pull together to survive. It is not knowable whether this pulling together will result in some new terrible -ism. But if it does, I have faith that the system will self correct.

The precise path is unknowable. Regardless, as I have said before, the end game will still be gold. And in the interim, it just might get poured down the throats of the heretics. Only to be collected in the end.

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