The New Hot Cold War

A new cold war is emerging, and it may be a lot hotter than the old one.

This weekend, nearly the entire Muslim world is up in arms.

The Danish consulate in Beirut has been torched. Protesters have also taken to the streets in Afghanistan, the West Bank, Iraq and New Zealand. Earlier, the Danish and Norwegian embassies in Damascus were set on fire.

The trigger for the protests and riots was the publication of cartoons depicting the Prophet Mohammed. But the real cause is far deeper, pitting the secular governments of Europe and North America against Muslim peoples from the Western Sahara to Malaysia.

The West’s bitter battle against Iran has a similar source. And on Saturday, the 35-nation board of the International Atomic Energy Agency just voted to report Iran’s nuclear case to the UN Security Council. But …

Iran Retaliated Immediately

Iran has ended all international inspections of its nuclear facilities.

It has begun full-scale production of enriched uranium that can be used for nuclear bombs.

And it has set off a chain reaction of events that could escalate into economic warfare, or even military action.

The response of world leaders in the past few days:

The Iranian regime is … the worlds leading state sponsor of terrorism.
	Defense Secretary Donald Rumsfeld
The world will not stand by if Iran continues on the path to a nuclear weapons capability.
	Secretary of State Condoleezza Rice
Looking back to German history in the early 1930s when National Socialism was on the rise, there were many outside Germany who said Its only rhetoric don’t get excited. There were times when people could have reacted differently and, in my view, Germany is obliged to do something at the early stages … We want to, we must prevent Iran from developing its nuclear program.
	German Chancellor Angela Merkel

The West has spoken.

Its leaders will not let the worlds premier supporter of terrorist organizations including Hamas, Hezbollah and Islamic Jihad develop the worlds supreme weapon of mass destruction.

Yes, there may have been a relatively lax attitude toward nuclear proliferation in the past. But no more!

No one needs to tell the United States and Europe how to connect the dots from Iran to terror … from terror to al Qaeda … and from al Qaeda to nuclear attacks on major cities of the Western world.

Nor do our leaders need any help asking the obvious questions: If terrorists had primitive nuclear devices, what would have happened in the World Trade Center bombing of February 26, 1993? What would have happened on 9/11? What about Madrid on March 11, 2004?

This is the last straw.

Clearly, with Iran, the West must draw and already has drawn an immutable line in the sand.

There is no turning back. There can be no compromise that results in a nuclear Iran.

The Frog Strategy

They say that if you want to boil a frog, you put the unsuspecting amphibian in a pot of cold water. The idea is to turn up the heat slowly but steadily, never letting the frog jump out.

This is precisely the strategy for Iran, carefully crafted by none other than the Secretary of State, Condoleezza Rice, along with her French, German and British counterparts.

Step one in the Frog Strategy was to politely ask Iran to end its questionable atomic research voluntarily.

Step two is the referral to the UN just decided upon this weekend.

And step three will be sanctions.

But the resolve and strategies of the West are matched, eye for eye, by the zeal and fanaticism of Iran’s leadership.

Iran is the modern worlds first and only Shiite Islamic Republic. Regardless of any elections, the Supreme Leader remains, as before, Ayatollah Seyyed Ali Hosseini Khamenei, the same cleric who succeeded Ayatollah Khomeini nearly 17 years ago, on June 4, 1989.

And even with elections, the Iranian people have overwhelmingly voted for the most radical supporter of the ayatollahs since the Iranian Revolution, squarely defeating any candidates that had tried, in vain, to nudge Iran back to some modicum of secular reforms.

Beware: The president of Iran and his ministers do not make the ultimate decisions that will determine the course of world history in the months ahead.

They bow to Ayatollah Khamenei, who, in turn, bows only to his personal interpretation of the word of God.

This is the man who will decide, almost single-handedly, how Iran retaliates against UN sanctions, how Iran escalates the crisis, and how the next phase of this new ever-hotter cold war will be waged.

The Fate of the Dollar
Hangs in the Balance

In an economic war between Iran and the West over oil or over trade the dollar price of gold, oil and virtually all commodities is likely to burst upward.

And as the dollar value of commodities surges, the value of the dollar itself will plunge. One is the natural reciprocal of the other. Despite some swings back and forth, the dollar must go down when the price of gold … and silver … and oil … and coal … and all natural resources goes up.

Indeed, the evolution of this nuclear crisis, starting in the final stages of World War II, is intricately intertwined with the evolution of the dollar crisis that we’ve been warning you about for many months.

And, not coincidentally, both of these crises nuclear proliferation and dollar devaluations have been shifting in and out of my family’s life since the day I was born.

Let me tell you that story. Then decide for yourself what you must do for your family.

Atomic Bombs and
Dollar Devaluations

I grew up during the cold war, and I suspect you did too.

In 1949, when I was three years old, the Soviet Union tested its first nuclear bomb, sending shock waves throughout the Western world.

People in Europe and the U.S. were thrown into a long-lasting state of semi-panic, and governments in several countries scrambled to respond.

In Finland, the government required all buildings of a certain size to have a shelter that could withstand nuclear, biological or chemical attacks. Switzerland went so far as to build a network of shelters large enough to protect and feed the entire population for two years.

In the U.S., they built nuclear fallout shelters in New York City, Chicago, Los Angeles and other major cities. But smaller towns and rural areas not deemed prime targets got few shelters, and some got none.

I didn’t pay much attention to all of this until I started kindergarten in Stamford, Connecticut. That’s when I suddenly realized something very serious was going on.

In our school, we had no fallout shelter. So in the event of a direct nuclear attack to our area, the plan was for all the children in my class to hide under their desks while putting their hands over their head.

We practiced doing that once every month or so. But some kids didn’t follow the teachers instructions. Instead of crawling under the desk, they just fell to the floor or leaned over a chair.

Once, I shook my finger at them. This is no joke, I warned. You could die just like all those kids in Japan.

Most people didn’t talk about Japan back then. But I knew something about it because of my parents. Years before the war, Mom and Dad had studied Japanese at the Japan Society in New York City. So Hiroshima and Nagasaki was a topic that came up in their conversation every once in a while, and one day, I overheard them talking about it. That’s why I took the nuclear drills more seriously than most of my classmates.

I think that’s also why I was pleased when I learned that we were moving to the jungle in Brazil. The cold war had nothing to do with their decision. But it did have something to do with my feelings about the move.

Three years later, when I was nine, we returned to the States for a few years, and I wasn’t looking forward to the monthly drills.

Strangely, though, after a couple of half-serious drills in 4th grade, the whole thing was suddenly dropped and nobody mentioned it ever again.

I figured it was all over, thank God.

So you can imagine my surprise when I later found out, that the cold war was not over. It had actually gotten a lot worse.

Inured to the Danger

The American people had simply become inured to the danger. And the government, which knew the drills were futile to begin with, gladly abandoned the whole effort.

Meanwhile, thousands more bombs were stockpiled on both sides, and each bomb was as much as a thousand times more powerful than the two dropped on Hiroshima and Nagasaki.

New countries were joining the nuclear club all the time: After the USSR tested its first nuclear weapon in 1949, other major world powers followed the United Kingdom (1952), France (1960), and The Peoples Republic of China (1964). Each new addition was routinely greeted with shock … but grudgingly accepted with a snub.

Israel, which is widely suspected of having the bomb but has never admitted it, was also tacitly accepted.

India, which tested a so-called peaceful nuclear device in 1974 dubbed the Smiling Buddha, is now an official member, while Pakistan, which tested its first nuclear device just eight years ago, has mostly worn down the initial resistance from the club members.

North Korea has also bragged it has the bomb, but, as a rogue state, is still not a member.

Total number of known nuclear states: nine … and counting.

Total number of nuclear warheads known to have been deployed worldwide: As many as 31,744, of which only a minority have been destroyed.

When I was old enough to understand, my father put it this way: God forbid we ever conquer the world with American A-bombs. All we need, really, is American dollars, as long as those dollars remain strong.

The Battle for the Dollar

In 1959, just around the time when fallout shelters were shut down and my school stopped its nuclear attack drills, the U.S. budget deficit was beginning to go haywire, with estimates running close to $13 billion, considered huge in those days.

In response, President Eisenhower gave one of the most important and least remembered State of the Union speeches in American history. He warned:

We must avoid extremes … of waste and inflation which could reduce job opportunities, price us out of world markets, and shrink the value of savings. To keep our economy sound and expanding, I shall … present to the Congress a balanced budget.

Eisenhower didn’t have to wait two decades to learn that budget and trade deficits would lead to a falling dollar. Nor did he have to wait until 2005, when the U.S. trade deficit surpassed $700 billion, the worst of any nation in history.

He already understood the dangers back then. But his opponents in Congress did not understand.

They charged that Eisenhower’s budget comes close to being a fraud on the American people. They mounted a ferocious political campaign to defeat it. And it looked like a big deficit was inevitable.

That’s when Dad decided he did not want to be just an innocent bystander. He couldn’t sit still while the country’s finances went to hell in a handbasket.

Yes, he loved Brazil where we had our second home. But he loved the United States even more. So he set off to organize a campaign of his own.

The Sound Dollar Committee

Years later, Dad told me the story:

I heard Eisenhower’s speech on the radio, and the very next morning, I ran down to check the papers. I looked for a headline such as IKE PROPOSES BALANCED BUDGET. But I couldn’t find it anywhere. No one seemed to care.

Soon a flood of economic experts paraded before Congress, testifying that the deficit was manageable, and inflation was not a present danger. The problem of a falling dollar was even further from their minds.

Then, in early February 1959, a White House spokesman announced that Ike was planning a grassroots campaign to combat spending legislation beyond his budget and would make a strong public appeal in his news conference the next day.

But the appeal was weak. And in the days that followed, there was no grassroots campaign. No protests, no editorials, no voter appeals to Congress.

I could not accept that. So I organized a committee. I called a good friend, Jim Selvage, of Selvage & Lee, a public relations and advertising agency. I also called Dean Alfange, my attorney, who had run for governor in the state of New York. The three of us had lunch, and I recommended the name Sound Dollar Committee. They agreed.

We invited Bernard Baruch to be our Democratic co-chairman and Herbert Hoover to be our Republican co-chairman. Hoover agreed but Baruch declined. He said he’d tried to convince Roosevelt and Truman to control the budget, but they had rejected the advice. He figured that the destiny of America was bigger deficits and more inflation, and there was nothing more he could do about it. So I decided to go ahead on my own.

Our first full-page ad in The Wall Street Journal to balance the budget and defend the dollar merely set off the first sparks.

Then, Chicago Tribune owner McCormack called and asked if it was OK if he placed his own full-page ad at his own expense. The Los Angeles Times and the New York Daily News followed suit. Soon, scores of newspapers and magazines joined the Sound Dollar Committee in a national mail-in campaign to balance the budget, prevent inflation, and protect the dollar.

Congressmen would walk into their offices in the morning, be struck immediately with the clutter of mailbags, and ask their clerks: What the hell is this? Where did all this mail come from?

It was an avalanche! According to an informal survey by the Chicago Tribune on the Hill, the total response was twelve million postcards, coupons, letters, and telegrams.

By mid-March, the publics attitude had switched from apathy to intense interest. According to Business Week, leaders in Congress began the session talking like big spenders; now they were talking about cutting Eisenhower’s budget.

Senator Proxmire, who had been steadfastly in favor of the spending programs, changed his mind and voted for the budget cuts. One Congressman after another shifted his vote to support the Eisenhower budget. And the budget was balanced!

The Last Balanced Budget

Unfortunately, that was the last balanced budget until nearly the end of the century. And even more unfortunately, while our budget deficit makes us weak, our trade deficit makes us many times weaker.

In retrospect, Bernard Baruch, who did not join my father in his battle, was right. The political and economic forces behind inflation were too strong; the forces behind moderation, too weak. In a 1959 letter to my father Baruch wrote:

Inflation flows from the selfish struggle for special advantage among pressure groups.

Each seeks tax cuts or price increases or wage raises for itself while urging the others to make the sacrifice, and with little regard for the national interest. …

Ever since the end of World War I, I have tried to show what the results would be giving all of my time and resources to this. But alas, my efforts have not succeeded. …

I hope that you and those associated with you will be more successful because it is just and should win.

General Leslie R. Groves

History plays twisted tricks, and that was certainly the case with the nuclear crisis, the dollars decline and my family’s trajectory through it all.

Because on the letterhead of the Sound Dollar Committee were two retired generals.

Why did they join? Dad told me that it was because they saw the connection between fiscal prudence and homeland security; financial stability and physical safety.

Both goals, they believed, were threatened by the same human weaknesses lack of discipline and outright greed. Neither, they insisted, could be achieved without the other for very long.

And ironically, General Leslie R. Groves was one of them. He was the man behind the construction of the Pentagon. And, he was also the man running a secret project based in the New York District of the Army Corps of Engineers: The Manhattan Project, where the worlds first atom bomb was made.

But this convergence of history is not just a coincidence.

Groves advocated no sharing of nuclear technology with allies. Even within the U.S. government, he zealously embargoed information from most agencies and departments, including the White House itself.

Today, with eight nations in the nuclear club, one rogue state claiming to be, and another, a leader of terrorists, vying to join, General Groves is turning in his grave.

If he were here today, I think he’d be the last to say I told you so. Instead, he’d be insisting on a sound dollar and a balanced budget. At the same time, he would take charge and lead the battle to make the homeland more secure and end nuclear proliferation peacefully.

I pray our leaders will have the courage to step up and do the same. And I hope you have been following our recommendations for safety and profit.

If not, check our latest issues at www.MoneyandMarkets.com. Its all there.

Good luck and God bless!

Martin

P.S. I see no way in which this is not going to drive energy prices through the roof. So if you want to join Larry to take full advantage of it with maximum leverage and strictly limited risk, you’d better get in touch with him now. His next set of recommendations is going out the day after tomorrow, on Wednesday.

They are long-term options (LEAPS) that he feels could rise as much as 16 times in value. The number to call is 877-719-3477.

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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