--- Begin Message ---Gary North's REALITY CHECKIssue 97 December 6, 2001 This is a follow-up report on the continuing threat of new viruses and worms. A new worm was discovered earlier this week. This one is more destructive than BadTrans. It destroys anti-virus software and firewalls. It's well-named: Goner. Its full ID is W32.Goner.A@mm. It uses the same distribution technique that BadTrans does: an e-mail attachment that sends itself to everyone in your list if you open it. If you receive an e-mail that says "Hi," and then goes on to tell you that the sender has included a file for you to open, delete it. The attachment is named GONE.SCR. For more information on this worm, visit http://www.pandasoftware.com It is analyzed on the home page, upper left-hand corner. The good news is that Panda Software has already updated its PQremove freeware program to kill Goner. You have to download the new version, and then open and activate it. I did this today. It ran a quick check on my hard drive. So far, I have not been hit. Once Goner is gone from your hard disk, you're ready for the next test of your system. To test how secure your computer is from hackers, use Steve Gibson's free service, Shields Up! https://grc.com/x/ne.dll?bh0bkyd2 If you find that your system is at risk, here is a good way to protect your system. Install Zone Alarm. It's free. http://www.zonelabs.com/products/za/pestpatrol.html You can buy Zone Alarm Pro, which updates your system as new threats appear. But the freeware version will increase your safety by orders of magnitude. THE REVIVAL OF RUSSIAN REGIONAL HEGEMONY We remember the fall of the Soviet Union a decade ago. I am one of those who believe that it really did fall. Communism is dead as an ideology in Russia. But this does not change the reality of Russian expansionism, nor does it change the fact of the desire of Russian leaders to re- establish Russia as a superpower. Only the ideology has changed. It is no longer messianic. Marxism is dead, but the competition for power is still alive. Russia has been striving for regional influence in the Indian subcontinent for two centuries. This has been called the Great Game. The competition between Russia and the Anglo-American West in this region has never ended. If you have ever read Kipling's book, KIM, or seen the movie with Errol Flynn, you know how long this competition has been in operation. In the last two months, Russia has made greater gains in the region than it did during the entire the twentieth century. The United States has opened the door the Russia for regional hegemony. Pakistan has now been sacrificed by American foreign policy. Pakistan was closely tied to the Taliban, which it funded in the 1980's with CIA money. For the last five years, the U.S. also made deals -- or attempted to -- with the Taliban. Now we have handed over control of the cities to the Northern Alliance, which is more closely connected to Russia. Pakistan and the United Front have been hostile from the beginning. THE OIL CARD Russia's client Muslim states in the Caspian Sea region are sitting on top of large oil reserves. This is common knowledge now. The implications for the West are enormous. Oil will flow into China and India when the pipeline is completed. Money will flow into Caspian Sea states. It will also flow to the nation and company that control the pipeline. This will undermine the oil-based economies of the Middle East. This will also put domestic political pressure on the governments of the Middle Eastern oil states. The public's dreams of wealth will be cut back -- a classic condition for creating a revolution. Downward pressure on oil has begun. This is recession-driven, but also the result of Russian oil output. Russia is making money, but it is also undermining the Middle Eastern Islamic kingdoms, which are perceived -- correctly -- as under America's domination. Canadian columnist Eric Margolis, who has spent time in Afghanistan, has written a perceptive analysis of the return of the Russian bear in the region. On November 25, he wrote: When Pakistan ditched its ally, Taliban, in September, and sided with the US, Islamabad and Washington fully expected to implant a pro-American regime in Kabul and open the way for the Pak-American pipeline. But this was not to be. In a dazzling coup, Russian leader Vladimir Putin stole a march on the Bush Administration, which was so busy trying to tear apart Afghanistan to find bin Laden it failed to notice the Russians were taking over half the country. The wily Russians achieved this victory through their proxy Afghan force, the Northern Alliance. Moscow, which has sustained the Alliance since 1990, re-armed it after 11 Sept with new tanks, armored vehicles, artillery, helicopters, and trucks. The Alliance's two military leaders, Gen Rashid Dostam and Gen Muhammed Fahim, were stalwarts of the old communist regime with close links to KGB. Putin put Chief of the Russian General Staff, Col. Gen. Viktor Kvashnin, and the deputy director of KGB, in charge of the Alliance. During the Balkan fighting in 1999, the hard-charging Kvashnin outfoxed the US by seizing Prishtinas airfield, thus assuring a permanent Russian role in Kosovo. Now, he's done it again. To the fury of Washington and Islamabad, in a coup de main, Kvashnin rushed the Northern Alliance into Kabul, in direct contravention of Bushs dictates. The Alliance is now Afghanistan's dominant force, and, heedless of multi-party political talks in Germany this week, styles itself the new `lawful government, a claim fully backed by Moscow. The Russians have regained influence over Afghanistan, revenged their defeat by the US in the 1980s war, and neatly checkmated the Bush Administration which, for all its high-tech military power, understood little about Afghanistan. America's ouster of the Taliban regime meant Pakistan lost its former influence over Afghanistan and is now cut off from Central Asia's resources. So long as the Alliance holds power, the US is equally denied access to the much coveted Caspian Basin. Russia has regained control of the best potential pipeline routes. The `new Silk Road will become a Russian energy super-highway. By charging like an enraged bull into the South Asian china shop, the US handed a stunning geopolitical victory to the Russians and severely damaged its own great power ambitions. Moscow is now free to continue plans to dominate South and Central Asia in concert with its strategic allies, India and Iran. The Bush Administration does not appear to understand its enormous blunder, and keeps insisting, `but the Russians are now our friends. The president should try to understand that where oil is concerned, there are no friends, only competitors and enemies. http://www.foreigncorrespondent.com/archive/for_oil.html * * * * * * * * * * * ADVERTISEMENT * * * * * * * * * * * YOURS FREE: 10-for-10 "Wealth Recovery" Portfolio - Beat The Market by 210% Since 1937 we have pioneered a system that has made ordinary investors rich. We've safely made gains that range from 22% to an annualized return of over 9 times your money... see how: $5,000 Soars To $65,813 $10,000 Increases To $131,626 $20,000 Grows To $262,252 Our time-tested system puts 3 strategies together - and helps you get back the money you've lost and positions you for almost inevitable profits... For information on how to get your FREE picks, click here: 10-for-10 "Wealth Recovery" Portfolio http://www.agora-inc.com/reports/FST/StayInLine * * * * * * * * * * * * * * * * * * * * * * * * * * * * * HAVE WE REALLY BEEN OUTFOXED? As with every price, the key to oil prices is the marginal price -- the most recent sale. The world oil market is a generally predictable system. Just so much oil can go through the pipelines to refiners, and then to consumers. Seemingly minimal shortages or gluts result in dramatic price swings. Russia has recently expanded production by almost a quarter million barrels per day. It did this through its Baltic Sea port. The price of oil has fallen, taking Enron and $45 billion in bad debt with it. One Kuwaiti official has predicted $10 oil if OPEC is undercut by non-OPEC producers. Russia has been undermining the cartel's price. But yesterday, Russia announced that it will cooperate with OPEC. Cartels are difficult to control. There is always a temptation for members to cheat. The benefit of lower energy prices is exactly what the world economy needs in a recession year. Europe and Japan are either in recession or headed there. If Russia sticks with its promise to OPEC, and the price of oil rises, this will accelerate the recession, especially in Japan. Jeffrey Nyquist watches Russian developments closely. He is convinced that Russia remains a geopolitical and military threat to the United States. He recently wrote: As Russia increases its market share at Saudi expense, the spoiled Arabian princes face political bankruptcy along with intensified extortion from terrorist organizations. According to Seymour Hersh's sensational Oct. 22 New Yorker article, the Saudi's have not only supported terrorists with money, but their weak standing with the local Moslem clergy forces them into what Hersh calls a "double deal," in which the princes support the West and the terrorists simultaneously. There is little doubt that Russia knows what Seymour Hersh knows. And it appears the Kremlin has been gearing up to exploit the inevitable. If Saudi oil production was paralyzed by terror attacks, Russia would become the world's largest oil exporter. Russia would then have the West over a barrel -- quite literally. . . . Some reports say the Saudi monarchy on which the West has relied for cheap energy is crumbling. A stunning Nov. 20 article in the Guardian written by David Leigh and Richard Norton-Taylor, offers further details. The war against the terrorists, says the Guardian, has undermined the Saudi state. While nearly everyone celebrates the fall of Kabul, senior Western policy-makers are wringing their hands. According to the Guardian, "the real cancer in the Middle East is not Afghanistan, but Saudi Arabia." "The Saudi royals have been paying off the terrorists with danegeld for a long while," says one of the Guardian's highly placed government sources. The Saudis, it turns out, are not really pro-terrorist inasmuch as they are unscrupulous, frightened and greedy. Sitting on 25 percent of the world's oil reserves, the Saudi princes wish to preserve their good fortune. But as Russia's output causes oil prices to fall, the Saudis find themselves without the necessary funds to pay everyone off. People who don't get paid can make a nuisance of themselves. We are now seeing the de-stabilization of the Middle East. On the one hand, Islamic terrorists are destroying any hope of peace inside the state of Israel. On the other hand, the falling price of oil is undermining the crucial American ally in the region, the Saudi royal family. Russia is clearly the winner. Nyquist continues: While browsing through old news clippings last week, I happened upon a 1997 article by Richard Staar, a senior fellow at the Hoover Institution, titled "Russia's strategy for the Islamic states and the U.S." According to Staar, the secretary of Russia's Defense Council, Yuri Baturin, openly admitted that Russia's new national security concept revolved around an "attempt to divert Islamic aggression away from Russia toward the United States and Israel." By exporting nuclear technology to Islamists and by sending 10,000 Russian specialists to Iran, Russia hoped to solidify what then Russian Foreign Minister Yevgeny Primakov called a "strategic partnership" between the Kremlin and radical Islam. By helping the Syrians build VX nerve gas sites near Damascus, by opposing sanctions on terrorist Libya, by selling heavy weapons to Iraq via China, the Russians ingratiated themselves with the most violent people in the Islamic world. "Over an eight-year period," wrote Staar, "purchases by former rogue states suggest a continuity between policies of the Soviet Union and Russia." . . . And then there is Russia's alliance with communist China. Once again, it is a strategic move that demands an explanation. But the experts are silenced by the requirements of economic optimism. This is the same economic optimism that leads us to obfuscate China's support for the Taliban. Many observers sneered at the DEBKA File intelligence report that alleged the dispatch of ethnic Moslem troops from the People's Liberation Army to Afghanistan. But last week Defense Secretary Donald Rumsfeld acknowledged that Chinese nationals were fighting alongside the Taliban forces at the city of Kunduz. As the conflict in Afghanistan drags on, the cancer on the Saudi monarchy grows. Even as North Korea threatens war against South Korea and China threatens Taiwan, all eyes are focused on the West's oil supplies. Meanwhile, Russia smiles and points to its new pipelines and oil refineries. If Saudi Arabia's oil fields are shut down by terror strikes, the price of oil could reach $100 per barrel. http://www.financialsense.com/stormwatch/geo/pastanalysis/112601.htm Nyquist believes that there is an undercurrent of Marxism-Leninism that still fuels Russian expansion. I think he is wrong. Marxism was a spent force long before the Soviet Union fell. Marxism's messianic promises of universal prosperity and freedom were no longer believed. The dream had been replaced by massive Russian bureaucracy and the elite control by the Communist Party, which constituted about 3% of the population. After 1980, the best and the brightest young people were not joining the Communist Party. They were going into business. American foreign policy in the twentieth century was based on a myth: that you can always work a deal with your opponent -- buy him off, in other words. Our foreign policy experts still assume this. It's incorrect. The interests of rival expansionist empires always clash. The Russians and the Chinese are still our rivals, despite trade agreements. Every empire uses State power to back up its interests. We are using ours in the Middle East and Afghanistan, hoping that the United Nations will secure our interests in the Great Game. This faith in the UN is misplaced. The Russians and the Chinese are dead set on cutting off our influence and the UN's in the region. The UN will be the front, but when warring Afghan factions go back to slaughtering each other, the only issue that will matter to the three empires is who controls the flow of oil and money. Russia looks like the winner on the money- collection side of the equation. Russia's client Muslim states have the oil, and it is allied with the Northern Alliance, which the United States has now empowered. RECESSION AND DEFLATION Russia's expansion of oil output was good for the Western economy in the short run -- cheaper energy -- but it was disrupting geopolitics. Existing investments in energy are producing losses, as the Enron debacle indicates. The West's debt structure through the banks and the complexities of the derivatives market place it at risk. We will see if Russia holds the line on oil output. I don't think this is likely. There is too much money at stake. If America's Middle Eastern allies can be undermined by lower oil prices, this will place Russia in the catbird seat. We are now seeing price deflation of commodities on an international scale. Unemployment keeps rising, despite lower interest rates. The U.S. recession is now apparent even to the cheerleaders. But the stock market is held up by faith. Investors think that it will come back and recover its 1999 upward move. This faith is held tenaciously. One thing is sure: retirement creates a need for income, and without dividends, stock holders who are facing retirement have to sell at least a portion of their portfolios. The greater fool theory cannot withstand the pressure of sales by retirees. There is no possibility that today's level of prices can be maintained, once the retirees start selling. This is what has destroyed all chances of recovery in the Japanese stock market. The downward selling pressure is too great in an aging population. This pressure is not immediate in the U.S., but it is there, like a shadow, when it comes to any consideration of "Dow 36,000." The question is: Will lower short-term interest rates make it possible for corporations to increase their profitability? The answer is no. The problem of corporate finance is the bond market, not the money market. If the FED increases the rate of monetary inflation, the bond market will drop when price inflation produces rising long- term rates. Debts must be paid off. In a world of escalating international competition and falling retail prices, American companies will not be rushing to expand long-term debt until profitability turns upward. There is no sign of this yet. In fact, the United States is in the midst of a secular decline in manufacturing that is worse than anything we have experienced seen since 1932. There have been consecutive 16 months of contraction. The statistics on the backlog of orders are even worse. Demand continues to fall. NAPM's Backlog of Orders Index indicates that order backlogs declined for the 19th consecutive month. NAPM's Supplier Deliveries Index continues to reflect faster deliveries. Manufacturing employment continued to decline in November as the index fell below the breakeven point (an index of 50 percent) for the 14th consecutive month. NAPM's Prices Index remained below 50 percent as manufacturers experienced lower prices for the ninth consecutive month. New Export Orders contracted in November for the third consecutive month. November's Imports Index moved upward but still failed to show growth for the month. Comments from purchasing and supply executives this month reflect continuing concern about the overall economy, but appear more optimistic than last month. . . . "The overall picture is one of continued decline in manufacturing activity during the month of November," added Ore. "The manufacturing decline is now in its 16th month and even with this month's signs of encouragement, it takes time to build a recovery across the sector. The sharp decline in new orders and production during October signaled the possibility of an involuntary inventory build, but is not confirmed by the data." . . . http://www.napm.org/NAPMReport/ROB122001.cfm Yesterday's rise in the stock market may be saying that good economic news lies ahead. Or it may only be saying that hope springs, if not eternal, then at least in bear market rallies. Manufacturing is under the gun. Demand is falling, and competition from foreign producers is becoming more price competitive. Export-dependent Asian countries are in a full-scale recession. They are desperate to generate sales. America's service sector is not suffering to the same degree as manufacturing because services are less vulnerable to competition from abroad. But there will be no recovery of the U.S. economy if the manufacturing sector continues to contract. CONCLUSION The official news from Afghanistan is that America is winning the war. The fact is, Russia is winning the war under the cover of U.S. bombs and a UN umbrella. Of course, Afghan warlords will determine who wins the pipeline competition unless the Caspian Sea states decide to cut a deal with Iran. That would surely seem the safer way to go. Economically speaking, it doesn't really matter to energy users who gets the money. What is important is that more energy is available. But geopolitics colors everything. The U.S. wants revenge against Iran and Iraq. It also wants stability in Saudi Arabia. The pipeline will undermine OPEC and strengthen Muslim client states of Russia. We are winning the ground war in Afghanistan, but losing the Great Game. 'Twas a famous victory. * * * * * * * * * * * * * * * * * * * * * * * * * * * * -- Been to the Daily Reckoning Marketplace Yet? -- If not, you ought to see what you've been missing. Want to read more from our regular contributors? This is the place to find it. We've collected some of the best financial advice and commentary available anywhere and presented it to you all in one place. 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