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The United States is the only superpower in the world. Love it or hate it, it shapes the international system in large and small ways. Its primary mechanism for doing so is the presidency. On occasion, the American president weakens to such an extent that, while he remains in office, he no longer is able to act decisively. His political base erodes; his ability to control Congress deteriorates. During such periods, something interesting happens to the international system: It is as if the superpower becomes inert. Rather than shaping the system, it turns into a mere presence. Opportunities for regional great powers, as well as for tertiary powers, abound. In the end, a new president emerges and the United States reasserts itself. However, the interregnum can be striking.
Since World War II, three presidents have gotten trapped in this position: Truman, Johnson and Nixon. The first two wound up in this position because of wars. The last was waging a war but became a failed president because of Watergate. In all three cases, by the time these men failed, they were capable of presiding but were incapable of governing. The world waited for their successors to arrive in order to resume doing business with the United States.
George W. Bush is not a failed president, but -- whether fairly or unfairly -- he is, at this moment, close to the brink. The inability to wrap up an Iraqi political settlement in the third quarter hurt him badly. It drove his popularity ratings down to the mid-40 percent range -- which is bad but not deadly. It was Hurricane Katrina and the perception -- again, fair or unfair -- that he mishandled the situation that drove him even further down, to as low as 38 percent in one poll, in others to 40 percent. This is very dangerous territory for a president. It means that the opposition party is holding the support of all of its own people, and that the political center has become hostile. At that number, the only thing a president holds is his own party.
Now, that does not mean failure. Presidents have rebounded from this position in the polls before. Clinton, for example, sank quite low but bounced back before his term came to an end. The key to survival is to hold your base. If the base starts to crack, that is the beginning of a failed presidency. Thus far, Bush has held his base. In fact, since Katrina struck, he has begun to rebound. Normally, we would say that he will readily survive and that he could be back above 50 percent in a surprisingly short period of time.
Bush, however, faces a number of serious challenges over and above Katrina. First, the indictment of House Majority Leader Tom Delay by a Texas grand jury, whether politically motivated or otherwise, will increase the pressure on the center, impeding any natural shift back to the president. Second, there is the problem of senior advisers Karl Rove and Louis Libby having been involved in outing the identity of a CIA agent, Valerie Plame. Depending on the facts as they finally emerge and how this is played, this could be enormously dangerous to the president, because it could strike at his core base of support. In its worst presentation, the charge will be that the senior aides to the president and vice president revealed the identity of a CIA agent -- or at least confirmed it to the media -- in violation of the rules they agreed to when they received their security clearances. If -- and that is a big "if" -- that was what occurred, it could quickly cut into part of Bush's base of support among Republicans. There is a segment of that base that is primarily motivated by the view that Republicans are more trustworthy when it comes to national security; the Rove/Libby situation cuts against that view.
Now, if the president were riding at a comfortable 53 percent in the opinion polls, this would mean little. But the president is at best in the mid-40s at the moment, so it matters a great deal.
All of this plays directly into the major issue at the beginning of the fourth quarter: Iraq. A referendum is scheduled for Oct. 15. More important, the Sunnis, Shia and Kurds remain locked in a tense negotiation over the shape of the Iraqi constitution and polity. Bush badly needs for the parties to reach a political settlement. However, their willingness to arrive at that settlement depends in part on their perception of Bush's ability to guarantee the agreements and punish any transgressors. The Sunnis, as a minority in Iraq, certainly are looking for such guarantees. The Iraqis are looking at the polls in the United States, and they understand the implications. They understand that the president -- like presidents before him -- might not be able to deliver on promises or threats.
That, in turn, decreases the likelihood of any settlement that depends on American guarantees. The jihadists already have begun to launch their pre-election offensive, and they are going to intensify it in the run-up to the elections. American media will be filled with pictures of an Iraq that is apparently out of control. As the jihadists do everything they can to keep the Sunnis from making a deal with the Shia, the images of violence will depress polls in the United States and further raise doubts about Bush's power. That will incite more violence in a nasty cycle that could crack his support base and unravel Iraq beyond repair.
As that happens, the entire coalition in the region will re-examine its position. The Saudis, whose political position in the jihadist war has been held in place since 2003 by American power, could reconsider their stance, as could the Pakistanis. The Iranians, seeing opportunities reopen in Iraq, would increase their pressure on Iraqi Shia, who -- lacking an American counterweight -- would have no choice but to fall into Iran's orbit. The entire structure created by the United States after Sept. 11 and the invasion of Iraq could crumble if Bush's ability to act is compromised.
The broader world would be affected as well. The Russians already are probing their periphery, seeking to reassert their influence against American encroachments. The Chinese, previously threatened by American trade sanctions, might not be off the hook, but they more likely would negotiate with the likes of Sen. Charles Schumer, a Democrat, than with Bush's representatives. And so on.
This is a dire picture, and not yet a forecast. For it to become a forecast, the president's Republican base of support would have to unravel. When Johnson and Nixon lost their parties, their presidencies were broken. It is not the opposition and the center that matters, but one's own party. That said, the mid-term congressional elections are approaching next year, and Republican senators and congressmen will have to decide whether to stand with the president or bolt. The forces pressing in on the Republican base are enormous.
If we were to bet, we would lay a 60-40 wager in favor of the president. His base is strong and won't crack easily. But the pressures that are coming to bear are also very significant. The Plame affair seems to us particularly dangerous to the base, along with the possibility that supporters of the war in Iraq might conclude the president lacks a strategy for the war.
The odds still favor the president. But the truth is that the month of October will determine the shape of this quarter and many others to follow. A failed presidency is not the most likely scenario, but it is far from an improbable one. And if that scenario should play out, the world will be a very different place to live in by the end of the fourth quarter.
Global Economy
As Stratfor expected in our third-quarter forecast, high energy prices accompanied robust growth in the United States and China for the past three months. But the main event economically was not the Japanese recovery, Chinese trade tensions or Europe's ever-lackluster growth. The really big -- and wholly unpredictable -- news originated in the United States when Hurricane Katrina roared ashore, handing the country a $200 billion cleanup bill and leading to the flooding of New Orleans, the city that straddles the mighty Mississippi.
Hurricanes Katrina and Rita have inflicted severe damage on U.S. energy production. At the time of this writing, all of the Gulf of Mexico's normal 1.56 million barrels per day (bpd) of oil output and 80 percent of its typical 10 billion cubic feet of natural gas output are stopped due to hurricane-related damage. The only good news in all of this is that the damage already has been factored into prices, so prices should moderate somewhat as the Gulf of Mexico energy industry recovers. We will not see sharp price falls, but as long as the world avoids another similar catastrophe, $70 a barrel should serve as a price ceiling for the rest of 2005.
Far more important than damage to offshore production facilities in the Gulf of Mexico, however, is the fact that some 25 percent of U.S. refining capacity is offline. Two-fifths of that is from Hurricane Katrina, and will remain offline well into the fourth quarter. The remainder is from Hurricane Rita and is in the process of coming back on line. The two storms have prevented the U.S. refining network from processing a total of some 75 million barrels of crude. And the hurricanes did far more than simply constrict the energy industry. New Orleans will be largely uninhabitable for the quarter to come, and losses of uninsured property alone have reduced American income by $100 billion, roughly 1 percent of gross domestic product (GDP). The Congressional Budget Office is projecting that the twin hurricanes will slice about 0.5 percent off of U.S. GDP growth in the third and fourth quarters.
Yet not only are there no petroleum product shortages, but gasoline stocks actually have increased for four straight weeks. This is partially due to emergency gasoline shipments from Europe, but mostly it is because U.S. gasoline demand has indeed dropped -- and dropped despite frantic rescue, recovery and reconstruction efforts, and the mad dash of some 4.2 million people out of (and then back into) the twin hurricane zones.
Such a sharp change in consumption patterns -- which is above and beyond the drop that accompanied the end of the 2004 summer driving season -- could prove to be a freak blip, but it is a blip that is of potentially critical importance. Energy prices have not had a substantial negative impact on U.S. consumption patterns since the time of the Iranian Revolution. Then, as in the Arab oil embargo before it, high energy prices triggered a recession.
The U.S. economy, of course, has evolved greatly in the past 20 years. In 2005 it is slightly more than twice as large in inflation-adjusted terms as it was in 1980. Oil prices -- while high in today's dollars -- are still well below the $105 a barrel level they were in 1980 in inflation-adjusted dollars. Additionally, the U.S. economy is roughly twice as fuel efficient as it was a generation ago. In short, the United States it is far more resilient to energy shocks than in times past.
But it is hardly immune -- or alone. High energy prices are eating into purchasing power, government budgets and social stability the world over, with energy intensive East Asia and politically unstable Latin America the worst hit so far. Most important, energy prices are contributing to a broader crunch in the United States that has the potential to trigger a national -- and then likely a global -- recession.
At issue is the so-called "yield curve." Typically, it is cheaper to borrow money in the short term than in the long term, because the risks of a loan souring are significantly less within four weeks than they are over 30 years. However, when investors get overly giddy with optimism -- or anticipate a crunch -- things change. Their demand for cash -- and cash right now -- results in a sharp increase in the costs of borrowing in the short term until it exceeds the costs of borrowing in the long term. The result is an inverted yield curve.
The last time the United States experienced such phenomena was at the height of the dot-com boom in 2000. At that time, frothy optimism for companies such as petpsychotherapy.com led to an inverted yield curve followed by a stock market falloff and then a recession. Typically, from yield-curve shift to stock-market crack is about three months, with recession following about three to six months after that. In this example, the recession began in March 2001.
As of early October, the United States does not yet have an inverted yield curve -- and there is no guarantee that it will necessarily happen -- but the curve has been flattening out for the better part of a year. (For financially minded readers, the yield on the Treasury's two-year government bond is now at 4.06 percent, putting it only 0.23 percent below the 10-year bond; the gap is only about one-ninth the rate it was one year ago).
The United States might -- just might -- be due for a bit of a downturn. Since World War II, the average U.S. expansion has lasted 52 months; as of the beginning of the fourth quarter 2005, the current expansion has lasted 46 months. Add in six months to generate an inverted yield curve and a break in the stock market and we are looking at a dead-on average age for the current expansion. The rest of 2005 should still be fairly bright -- in economies the size of the United States, downturns simply do not happen quickly -- but in economic terms, at least, 2006 is looking murkier by the day.
East Asia
The fourth quarter will see rapid shifts from confrontation to cooperation in East Asia. It will also be a quarter of exploiting nationalism between Northeast Asia's biggest rivals. China commemorated National Day Oct. 1 and will soon launch its second manned space vehicle. In Japan, Prime Minister Junichiro Koizumi is planning another controversial trip to the Yasukuni Shrine and is laying the groundwork for constitutional reform.
Koizumi has won a new mandate as well as control of more than two-thirds of Japan's parliament. He also stands poised to act on a series of initiatives, from domestic economic reform -- beginning with initial steps to privatize the postal banking system -- to constitutional change to an international push for political, economic and military influence. Koizumi now controls enough of parliament to alter the pacifist Article 9 of the Japanese Constitution, though he may wait until after the new year for this step.
Koizumi is set to meet U.S. President George W. Bush prior to the Asia-Pacific Economic Cooperation forum (APEC) summit in November to discuss upgrading the strategic alignment between Japan and the United States. While the rise of China represents a long-term concern for Washington, Tokyo sees it as a much more immediate concern, particularly since China has beaten Japan in exploiting energy resources in the East China Sea. Increased naval and airborne patrols of contested waters may well lead to an accidental clash between Japan and China, something that could stir nationalistic flames in both nations.
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