Asymmetric War and Financial Bets

The blog present following topics:

1. Introduction     
2. Asymmetric Bets
3. The Big Short and  Bubble Economies
4. The Obama Factor
5. Pakistan Big Short Option
6. The Afghanistan’s Future
7. References and notes

Introduction 

The political soap opera now being staged inPakistanindicates that it may be plunging into one more political crisis in its short history (1971 – present). If constitutional remedies are applied for the resolution of political crisis may strengthen basic institutions of the fragile democracy.

The weak government institutions continue to support army and intransigent warlords managed proxy wars even though its fragile economy lacks resources to sustain the annual costs at an estimated $1 bbl for maintaining 100,000 proxy warriors. Using the mercenary proxy warriors a goal appears to be to dominate South Asia with economic and military aid from theUSand Arabs interested in the regional hegemony. TheUSsupport for the army is waning and the army is reconsidering its contracts and the Af-Pak policies.

The blog examines and draws parallels between the financial bets by gamblers on the Wall Street (WS) and the economic aspects related to asymmetric wars. It also dwells on why theUSis not forPakistandomination ofAfghanistan.

Asymmetric Bets 

There are two types of crap shooters in addition to those at the craps tables inLas   Vegas. The crap shooters exist on the Wall Street (WS) and in the army that behaves like a state within a state or as a deep state. Typically, may be in a state of delusion, the crap shooters throwing dices psychologically behave like they can make the dice to work to their advantage. Once the money is lost, the delusion is busted ending the game. The crap shooters at the casinos come and go and they always loose, judging from the fact that crap shooters breaking the bank is a very rare occurrence.

The Asymmetric bet players who have done due diligence research have better odds of winning a bet than the crap shooters. Any bet is asymmetric if potentially it can reap a few to 100+ times the cost or value of the bets. The option players in financial markets are like crap shooters; they place bets (less than 2% or 200 basis points) in the markets to minimize losses and hope to win big (100%) money. In asymmetric wars as inAfghanistanthe army is using low cost proxy warriors to defeat a powerful enemy (theUSand NATO) for substantial extra territorial gains.Pakistanhas yet to show any long term gains.

In Pakista npolitics the army is most powerful institution and for sixty four years (1947 – 2011) it has managed to get away with asymmetric wars by allowing its military dictators to carp shoot in the war fields. In final analysis winning a battle (the US special forces killing of Osama bin Laden) gets counted as a personal achievement and the failures (the 1971 Bangladesh war) turn into the social problem. Dictator Yahya Khan attempted a crap shoot (Dec 3, 1971) with a surprise air attack on India and he lost big time. He precided over disintegration of the nation.

Asymmetric wars of short duration and asymmetric bets (going short on options) on stock markets can deliver economic bonanza for those who have done due diligence research. The short duration in such cases is about a few weeks to five years. However, long term asymmetric bets can bring disastrous results both in wars (lasting a decade or more) and on the stock markets (going long on options).

The Big Short and Bubble Economies 

The big short strategy and bubble economies generally run in parallel.

In a book, “the Big Short” (2011) Mr Michael Lewis described the economic bubble (2002 – 06) created by the unregulated subprime mortgages and as the economic bubble busted, how the Wall Street crash of September 18, 2008 was responsible for the global recession. Greed driven actions of a few hundred bankers, CEOs of the financial institutions and hedge fund speculators precipitated the global economic disaster.

The big short strategy on the Wall Street (WS) was to maximize returns by placing an asymmetric bet in the form of options prior to the end of bubble periods. In recent times financial markets of theUSand EEC has experienced the dot.com and subprime mortgage bubbles.

On Wall Street and EEC markets the economic bubble (2002 – 09) was precipitated by the greedy bankers and the financial institutions. They manipulated bond markets to bring a disaster in the form of global economic crash. Although the mortgage bubble (2002 – 2006) appeared on the President George Bush watch, its deleterious consequences (2007 – 12) continued on to the President Obama watch.

Dictator Musharraf led the army to more than one crap shoot (1999 – 2008); first as the army COAS and then as the Dictator and also created a bubble economy. The dictator is gone and a new disaster may be in the making as Pakistan economy continues to spiral downwards as a result of maintaining a mercenary army of about 100,000 proxy warriors.

The big short military strategy of asymmetric war is to use mercenary proxy warriors – usually terrorist or guerrilla fighters – to confront a better equipped enemy be it a conventional or nuclear capable army.Pakistanhas a long history of engaging in asymmetric wars.

Immediately after the midnight of freedom (August 14, 1947)Pakistanstarted using proxy warriors against India. In 1948 Pakistan proxy warriors’ invaded Kashmir and the war ended with a military division of the Kashmir state. The line of control (LOC) divided the area under each army’s control.

In 1965 same strategy was used again to attacked Kashmir east of LOC. Pakistan did not make any gains. In 1999 the proxy warriors occupied Kargil ranges east of LOC. Pakistan lost the Kargil war.

Pakistan was provided military and economic aid by the US and Arab nations to develop a proxy warrior force of 30,000 mujahedeen to dislodge the soviets from Afghanistan (1979 – 89). During this period seeds of a bubble economy were sowed as billions in the US and Arab aid poured in.

The soviets forces left Afghanistan in 1989 and the US aid was suspended in 1991. Once the US left the region the mismanagement of the bubble economy started. The bubble economy was mismanaged by PM Nawaz Sharif. A few days after the army over threw (1999) the elected government of PM Sharif, General Musharraf as the 4^th military dictator announced that Pakistan’s treasury was empty.

Pakistan economy is dominated by agriculture and associated businesses, services and foreign aid. The productions of internationally tradable consumer products in the economy are low and its foreign reserves are not enough to cover annual imports. The economy in last two decades has spiraled downwards asPakistancontinued using its limited economic resources to convert the residual mujahedeens to create 100,000 Taliban mercenaries.

Dictator Musharraf (2002 – 2008) created the second bubble economy by aligning Pakistan with the US after the 2001. Ignoring the open secret of using the mercenary armies, for a decade the army denied any engagement in terrorism unleashed in the Af-Pak region and against India.Pakistan annual defense budget has grown from $2.5 billion to $5 billion from 2001 to 2011. The army essentially consumes nearly 50+% of available resources.

Dr Farrukh Saleem over last two decades has analyzed the mismanagement of the economy and in his recent article highlighted its impacts on government and nation. The economy is short of one trillion rupees ($37.5 billion at Rs 80+ per dollar) a year based on what the government of Pakistan (GoP) earns and what it spends. Continuation of current strategy of the Af-Pak war is going to further degrade its economy.

The Obama Factor  

The Obama strategy is to the counter the proxy warriors with a strong Afghan army and high-tech low cost drones to eliminate intransigent terrorist warlords on both sides of the Durand line. Annually billions of dollars in theUSaid are provided in exchange for a limited cooperation of Pakistan in the Af-Pak war.Pakistan continues to maintain an economic bubble with foreign aid and foreign inflows. The breaking point for the economy or busting of economic bubble is most likely to come after 2015 once the allied forces in 2014 are withdrawn from the Af-Pak region and theUS aid to Pakistan dries up.

In preparation for the planned withdrawal by 2014 of the foreign forces theUSand NATO are developing an Afghan army with 350,000 men. The goal of the Afghan army will be to inhibit reemergence of al Qaeda and to prevent proxy warriors of Taliban to take over Afghanistan.

At an estimated $10,000 a year per soldier for equipping and maintaining the Afghan army as well as humanitarian economic aid to Afghanistan the annual cost to the US and NATO would be $3.5+ billion. It is likely that my cost estimates may be high for military and economic aid to Afghanistan to protect Afghan sovereignty. The neutralization of challenges by the proxy warrior from east of the Duran Line depends on how long Pakistan intransigent warriors continues to infiltrate Afghanistan. The US and West have economies that can sustain military and economic aid to Afghanistan at this level for many years and certainly longer than Pakistan can support a mercenary force of up to 100,000 to fight in Afghanistan at an annual cost of $1+ billion.

The Pakistan army assumed that with time, the anti-war public opinions at home will inhibit theUSto aggressively pursue a long period war in Afghanistan. The army organized an estimated 100,000 proxy warriors to engage in an endless war in Afghanistan. Unlike the US anti-war public opinions for wars of choice in Iraq and Vietnam, the US public is for the war of necessity against the al Qaeda co-linked Af-Pak based terrorist. The Pakistan goal of a perpetual war in Afghanistan was to force the US and Europe (NATO) to retrieve from the Af-Pak area after being humiliated by the Taliban operatives.

After the death of Osama bin Laden, politically the US and Pakistan started drifting apart as Pakistan is finding out that there is no US support for its policy of dominating Afghanistan using its asymmetric war strategy.

Pakistan Big Short Option  

The big short strategy for Pakistan rentier army was to defeat its perceived enemies in an asymmetric war. A win for mercenary proxy warriors against a super power has very tempting prospects. Judging from Pakistan army’s record of all wars it participated in last 64 years, in long terms the army has been not very successful in managing its economy or fulfilling its ambitions for extra territorial expansions.

In short term Pakistan proxy warriors achieved success against Soviets occupation of Afghanistan.Pakistan proxy warriors called Afghan Taliban invaded, occupied and established Emirate of Afghanistan and ruled it (1996 – 2001) with devastating brutality to Afghan population.

Thereafter the geopolitical picture got complicated. The unintended consequence of the proxy war was the attacks on theUSby al Qaeda operatives. After more than a decade (2001 to present) as an ally of the US, in economic terms Pakistan may lose the war if the war in Afghanistan continues not only for next two years (20122 – 14) but beyond 2015. The long term investment in the asymmetric war is detrimental to Pakistan economy.

The Afghanistan’s Future 

Once the allied forces leave the Af-Pak area, starting 2015, the Afghanistan government will have NATO and the US trained 350,000 military force and the US aid annually an estimated $3.5+ billion to challenge proxy warriors. As long as the US and NATO continue to finance and supply military hardwares to the Afghan army potentially a continued regional conflict with 100,000 proxy warriors may become an albatross around the neck or an annoying burden for Pakistan.

Afghanistan has valuable commodities assets estimated to be at up to $4 trillions, which can be exploited for generating revenues to maintain by proxy warrior standards a well armed the US and NATO equipped professional Afghan army.

References and notes 

1. Pak’s ex-army chief Ziauddin Butt, “Musharraf, Kayani knew Osama’s whereabouts,”  http://timesofindia.indiatimes.com/world/us/Musharraf-Kayani-knew-Osamas-whereabouts-Paks-ex-army-chief/articleshow/11231991.cms

2. Gulmina Bilal Ahmad, “Pakistan Defense Pvt Ltd”; http://www.dailytimes.com.pk/default.asp?page=2011%5C12%5C23%5Cstory_23-12-2011_pg3_2

• The army supports tribal lashkars for waging proxy wars inAfghanistanandIndia. The tribal lashkars are the amalgamation of right-wing mainstream political parties and banned militant outfits including Pak-Afghan Council, Muttahida Jihad Council and the Pakistan Defense Council (PDC).
• At a recent rally held inLahore on December 18 by the PDC mainstream political figures and the leaders of      banned terrorist organizations were present.  Prominent attendees included Ijazul Haq, Sheikh Rashid Ahmed, General Hamid Gul and Syed Munawar Hasan shared the stage with Hafiz Saeed, head of Jamaat-ud-Dawa (JuD). Members of at least 500 banned seminaries are openly working at such rallies without any fear or even a slight concern for the rule of law and state authority.

3. Cyril Almeida, “Rally in Lahoresends alarm bells ringing,”  http://www.dawn.com/2011/12/21/rally-in-lahore-sends-alarm-bells-ringing.html

• A rally was organized by the Difaa-i-Pakistan Council (Pakistan Defense Council) at theMintoPark(at the foot of the Minar-i-Pakistan). The rally was attended by jihadists, sectarian warriors, orthodox mullahs, Islamic revivalists, all banding together under the banner headlined by Hafiz Saeed, leader of the Jamaatud Dawa      (JuD), widely perceived as a front for the banned Lashkar-e-Taiba. The event was a massive show of right-wing strength and has come in the wake of a heightened public profile by the JuD in recent months.

4. Khalid Aziz, “A troubled country,” http://www.dawn.com/2011/12/23/a-troubled-country.html

• In a defense authorization bill signed on 12/11/2011 President Obama the bill seeks to suspend 60% of $1.1 billion until progress in strategies to counter manufacturing of improvised explosive devices (IEDs).
• IEDs mostly manufactured inPakistanin its illicit factories are one of the largest factors responsible for the death of US troops inAfghanistan.

5. Munir Akram, “State without a state,”  http://www.dawn.com/2011/12/25/state-without-a-state.html

6. Dr Farrukh Saleem, “Our Real Problem? And Are Polls the Solution?” http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=83977&Cat=9&dt=12/25/2011

• One trillion rupees is the difference between what the Government of Pakistan (GOP) earns and what it spends.Pakistan is filling the current deficit of trillion-rupee corruption-cum-incompetence by printing Rs3 billion a day, every day. And, that’s inflation, plain and simple.
• Pakistan’s external accounts deficit is a bigger problem than the budget deficit as it cannot be managed by printing of notes. Estimates are the reserves of $12.8 billion would be depleted to $2 billion if all its foreign debts due in 2012 are serviced.

7. Dr Farrukh Saleem, “Coup d’état,”  http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=85217&Cat=9

• Dr Saleem summarized history of last five Coup d’états. For each coup an opposition politician colluded with   the army to bring about overthrow of government in power and then a chief justice was involved in endorsement of the dictator.
• Dr Saleem observed that this time army does not have support of any opposition politician. Both army and      opposition politicians have lodged an inquiry against the President Zardari and PM Gilani in the court for a resolution of issue that in the memogate issue they may not have acted constitutionally.
• Almost all Pakistani coup d’état were supported – either immediately or within a few months – by the US. In essence, all ofPakistan’s coup d’état had an internal and an external dimension.
• Latest news is “Alleging that Supreme Court justices were compromised by the establishment, Asma Jahangir has refused to represent Hussain Haqqani involved in the memogate.”
• The political soap opera continues Pakistani style.

8. Dr Farrukh Saleem, “What do they want?” http://www.thenews.com.pk/TodaysPrintDetail.aspx?ID=87653&Cat=9&dt=1/15/2012

• To be certain, the Pak Army has a serious interest inPakistan’s economy and that is for two reasons:
• First; if the size of the economic pie does not grow then the size of the defense budget cannot grow either.
• Second; an economic meltdown will damage – or whatever is left of it – the domestic social fabric and that      in return will open up vulnerabilities on the external front.
• The generals know full well that the economy ensures internal security and economic growth is the prerequisite to jacking up the defense budget.
• And therein lies the answer to the riddle. Zardari is prepared to give whatever the generals demand but      perhaps what they now demand is beyond Zardari to deliver – economic management.