Saturday, April 26, 2008

Updated Risks Of The Truckers' Strikes

As I have previously noted in Risks Of Truckers' Strikes, the risks of the Truckers strike are real. I confirmed this with Michael (JB) Schaffner, one of the organizers of the April 28 truckers’ march on Washington, D.C., who said there has been tremendous support and sympathy for the truckers and their plight. Since my write up on Tuesday, there was a change to the truckers’ route. This is a FYI for those who are interested in joining in or just wanting to stay out of their ways.

The independent truckers have nothing more to lose as their fuel cost continues to go up while their freight rate does not. With the cost of diesel now approaching $4.20 per gallon, nearly 130% increase from 2007, the truckers’ pain has become more acute. If the trucker’s rally on Monday April 28 is successful, which I think it will be, it will set the stage for the nationwide strikes, one planned for May 1 and a second planned for May 5. According to Michael (JB) Schaffner, the national strike on May 5 is going to be a weeklong strike. So, please plan accordingly by stocking up on essentials well before then.

Risks Of Continued Truckers’ Strike[i]
Impact to the overall U.S. economy: Nearly 100% of all durable and non-durable goods are transported at one stage or another by trucks and these two items account for 22.6% of the 2007 Gross National Income (GNI) of $12.4 trillion, or $2.8 trillion. So if the national truckers strike is successful, then each day that the truckers are on strike will result in a loss potential of $7.7 billion to the GNI.

Impact to the businesses: Trucks strike will mean that businesses dealing with perishable items will most likely will suffer significant losses as the critical parts and supplies are not delivered. They will also face tremendous loss of revenue from inability to deliver their perishable goods to the market. Cost of this is included in the impact to the overall U.S. economy.

Impact to import / exports: With devalued dollar, export is the only bright spot in the current economy. With the truckers’ strike, virtually all shipping will cease. This component makes up 12.9% of the GNI, or $1.6 trillion. Every day that the truckers strike, $4.4 billion in imports / exports of goods are affected.

Impact to Consumers: Those consumers who did not plan appropriately will have to do with staples or find alternatives. Consumers make up the bulk of the U.S. economy with 64.6% of GNI, or 8 trillion. For each day of the truckers’ strike, there will be a material impact on the consumers’ willingness to purchase goods. Even if 10% of the consumers were affected by the truckers’ strike, it means a potential loss of $2.2 billion per day.

Impact to Diesel Spot Prices: Spot prices will drop temporarily and then recover as the week wears on.

So, a daily monetary impact to the U.S. economy is approximately $14.3 billion (this is revised upward from the initial calculation of $10.7 billion due to the revised GDP figures from BEA).

I still think that the government should provide relief to the trucking industry from the Federal tax of 24.4 cents per gallon of diesel fuel. Diesel consumption in 2007 was about 46.6 billion gallons[ii]. Applying the total cost of the diesel fuel tax relief to this amount would be approximately $11.4 billion per annum, or less than one day’s worth of truckers’ strike. Hopefully, the Bush administration will take notice of the truckers’ plight and their tremendous impact on the overall U.S. economy to find a solution to the high price of diesel.

Regards,
Ed Kim
riskyops.blogspot.com
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[i] Data obtained from BEA U.S. GDP 4Q 2007 revised, table 9: http://www.bea.gov/newsreleases/national/gdp/2008/pdf/gdp407f.pdf
[ii] According to the EIA, approximately 46,645,142,880 gallons of diesel fuel (labeled as distilled fuel oil) was consumed in 2007. Relaxing the $0.244 tax on the distilled fuel oil would cost the U.S. approximately $11.4 billion

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Friday, April 25, 2008

Bush’s Rebate Checks Will Not Be Very Stimulating

President Bush made his usually lengthy and highly logical speech this morning that the $160 billion in economic stimulus rebate checks are on their ways to 130 million taxpayers. According to Bush, the rebate of $600 per individual and $1,200 per family will “…help Americans offset the high prices we're seeing at the gas pump and at the grocery store…”

Given that the price of gasoline averages $3.50 per gallon, milk averages $4 per gallon, and grain prices have increased more than 35% since 2007, I find it very difficult to take Bush’s comments at face value. Much like the U.S. dollar, his comments will be substantially discounted.

A typical driver used about 703 gallons of gas in 2005. Assuming the same consumption level today, this average 58.6 gallons per month for a typical driver. At an average of $3.50 per gallon, this comes to $205 per month on gasoline. A typical family of four spends about $400 to $500 per month in groceries. These two expenditures will cost a typical family about $600 to $700 per month.

So, if the typical family spends the stimulus rebate check only on gasoline and groceries, the $1,200 will last about 1.5 to 2 months. Some stimulus. The U.S. consumer is not really in the mood to spend right now, according to Bloomberg report that notes “U.S. consumer confidence fell more than forecast in April to a 26-year low as record fuel prices and rising unemployment threatened to reduce spending.”

Reuters/University of Michigan sentiment index April report notes that only about 30% of the consumers stated that they would spend the rebate in 2008 and then mostly pay down debt.

“Although the tax rebate will boost spending temporarily, the global rise in food and fuel prices, the declines in home values and higher credit standards are likely to persist for some time and lengthen the period of stagnation in consumption. Coupled with weaker job and income growth, these factors are likely to cause a relapse in spending latter in 2008 and into early 2009 and potentially deeper cutbacks in consumption than has been anticipated.”

Again, reality contradicts Bush’s misplaced optimism.

Now for the other side of Bush’s comment: “…and it will also give our economy a boost to help us pull out of this economic slowdown.” OK, $160 billion is a lot of money and maybe it can help to “pump” the economy. However, the U.S. economy is $13.86 trillion, so it is difficult to see how the $160 billion in rebate check, which is about 1.2% of the GDP will be able to help pull the U.S out of the slowdown.

The Fed has already spent $200 billion – $100 billion in Term Auction Facility, $59.5 billion in Term Securities Lending Facility and $30 billion on Bear Stearns takeover by JPMorgan Chase – and these efforts have not helped to pull the U.S. economy out of its slowdown.

The U.S. is now the laughing stock of the world thanks to Mr. Bush’s business acumen. Here is a piece from the International Business Times on what the world business leaders are reading about the U.S.:

“He is the nation's biggest economic cheerleader at a time of deep uncertainty. "The United States is on top of the situation," he declared Monday. It all has some people shaking their heads. Is there a disconnect here? Does the president get how this might feel to the little guy? Is there a different standard for the big financial community and the strapped homeowner facing foreclosure?”

As I have said it before, thank goodness for term limits. Let me close out this article with an excellent summary of the many failing of the Bush Administration put together by House Majority Leader (D) Steny Hoyer.

Regards,
Ed Kim
riskyops.blogspot.com

P.S. Luckily, the stimulus rebate is not taxable - EK

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Thursday, April 24, 2008

Risk Analysis Update On The Grain Shortage

Brazil, with their restriction on rice export, now joins Russia, China, India, Egypt, Cambodia, and Vietnam. This list of countries that are restricting exports of grain will grow as more countries decide to add to their stockpile as hedge for global grain supply uncertainty. Thailand, a major exporter of rice, may announce some restrictions in the near future. China has also stopped work on new ethanol production while it assesses the risks of the potential grain shortage on its population and economy.

While there is no shortage of grain in the U.S. yet, the news of Sam’s Club and Costco limiting purchases of rice has brought the issue to our doorsteps. The news of limits on purchases of rice will create an artificial run on rice as small business and restaurants that use rice will stock up.

Also, with our tunnel vision focus on turning corn into ethanol, the U.S. is in danger of running short on wheat, our staple, as more farmers have switched to growing corn to feed the ethanol production. This headlong rush into corn ethanol is setting the stage for a calamitous event for the American farmers.

Growing corn depletes the soil of its nutrients and thereby requires more fertilizer. This has driven up the cost of fertilizers and potash, a key ingredient in fertilizers. These along with increased costs of gas and diesel have made it more expensive to grow crops. A knock-on effect of this increased cost will be for farmers to cut corners on the use of fertilizers while growing wheat and corn. Few years from now, expect to hear news of farm production declining substantially as the soil becomes completely depleted of nutrients.

In my previous article “Risk Analysis Of Global Grain Shortage” I have noted that the risk of the grain shortage will lead to series of 14 risk events that may occur. Some of the risk events – ever increasing grain prices and people beginning to hoard – have already happened. Expect more of the listed risk events to unfold in 2008-2009.

Regards,
Ed Kim
riskyops.blogspot.com

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Wednesday, April 23, 2008

Mr. Bernanke, Raise The Fed Fund Rate!

Difficult Times Require Drastic Measures
European Central Bank (ECB) is doing the right thing by addressing the inflationary pressure on basic good by contemplating raising interest rates rather than lowering as BoE, U.S., and Canada have done. With consumer prices rising at an annual rate of 3.6%, the ECB is tackling the problem that vexes most people affected: the consumers.

The European banks are also afflicted with the same credit crisis that afflicts the U.S. and the English banks. In fact, the banks with the largest write-downs have occurred to UBS with about $40 billion since 2007. However, the banks’ write-downs and adding to their capital are not deterring the ECB from addressing the inflation worries.

This is a drastic measure that is being positively viewed by the market as the Euro zoomed to a new high against the dollar today. While the accounting rules are different in Europe than in the U.S., it is not that different. In fact, the U.S. accounting standards is scheduled to converge with the International Financial Reporting Standards (IFRS) used in Europe in 2008.

So why is the ECB looking hawkish on inflation while the Fed is not? The credit crisis has hit both sides of the Atlantic and some Asian Banks. I think the difference lies in the different thought processes. The ECB is looking at the overall impact of the inflation to the common folks while letting the banks fend for themselves. The opposite appears to be true in the U.S.

With the Fed fixated on restarting the economic engine by pumping more liquidity into the market, there is no hope that the Fed will finally realize that for all their efforts to date, the economic engine that the banks once were is kaput and should be left alone to resolve itself.

Drastic Measures
If the Fed can come to grips with the fact that the inflation is affecting 300 million Americans, which comprises nearly 70% of GDP, while the bank credit crisis is affecting less than 10% of GDP, then they will reverse their trend and raise the Fed Fund rate.

The effect of raising the Fed Fund rate will be immediate. For one, the U.S. dollar will begin to firm up against foreign currencies. This will force the commodity speculators, especially the ones speculating in oil to sell out of their positions, thereby quickly reducing the cost of oil and other commodities that have seen substantial appreciation.

The naysayers will say that the increase in Fed Fund rate will make borrowing difficult. Hello, it is already difficult. The credit lending standards have reverted back to a conservative stance, forcing marginal borrowers out, which is a good thing. The nasty secondary effect of the tightening of the lending standards was the widening of the CDS spread. However, cooler heads are asking if the CDS spreads were overdone.

For the average consumer, the rising prices of basic goods are more hurtful and immediate to their finances than the credit crisis. Even to the consumers who are underwater in their mortgage. The banking industry will survive, even with all of the level 3 assets. While some banks will disappear a la Bear Stearns, the shake out will result in a chasten industry that will emerge from this mess well capitalized.

The risks from low Fed Fund rate are hurting the U.S. far more than the credit crisis. There are some Fed Governors that realize this. The more the Fed persists in helping the few at the expense of the many, the higher the likelihood of the U.S. going into a stagflation period. Hopefully these few Fed governors will convince Bernanke to reverse course and increase the rate. To mitigate the shock to the banking system, the Fed can leave the discount window rates at its current level and, simultaneously, expand their TAF and TSLF programs, which will provide liquidity to the banks while the Fed fights inflation. These are difficult times and drastic actions are now required.

Regards,
Ed Kim
riskyops.blogspot.com

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Tuesday, April 22, 2008

Risks Of Truckers' Strikes

I have previously noted in Risk Analysis Update – A Forward Looking View Of The U.S. Economy that one of the signs of the further downward spiral of the U.S. economy was the risk of increased frequency and duration of truckers’ strikes, which would negatively affect businesses’ supply and product chains. While truckers’ strikes have been sporadic and unorganized to date, it appears that the truckers are getting better in organizing a major strike soon.

According to Technorati, a site dedicated to monitoring trends in the Internet blog space, the frequency of the blogs and social websites that had posts about ‘truckers strike” increased exponentially in the last few weeks. While most of the sites appear to be individual rants, there are some sites that seem well organized to generate serious consideration.
One of these sites is truckerstrike08, a blog on myspace, which has detailed directions of the planned strike set for April 28 in Washington, D.C. This direction was posted on today, April 21. In case they make the post private, here is a page shot of the directions: If this strike does occur, which I think it will since the independent truckers have nothing more to lose, then do expect the truckers’ movement to pick up speed. According to other websites[i] sympathetic to the truckers, there is another planned strike, this time nationwide, on May 5.

While the end result of the independent truckers’ strike may be only limited delay for the business, the congress and the President should take notice of the plight of the hard working men and women in the country that are trying to do things right and they are not getting a break. It would seem disingenuous for our government to work on trying to save borrowers who are in default of their mortgage while not working to save the network of truckers who delivery everything that we purchase to our local stores.

One option may be for the Federal Government to provide relief to the trucking industry from the Federal tax of 24.4 cents per gallon of diesel fuel. Since diesel consumption in 2007 was about 46.6 billion gallons[ii], the total cost of the diesel fuel tax relief would be approximately $11.4 billion per annum. While this would seem like a lot of revenue lost, it is far less than the estimated $30 billion to $100 billion for the homeowner bailout. Moreover, nearly 100% of all durable and non-durable goods are transported at one stage or another by trucks and these two items account for 28.3% of the 2007 GDP of $13.84 trillion, or $3.9 trillion. So if the national truckers strike is successful, then each day that the truckers are on strike will result in a loss potential of $10.7 billion to the GDP.

Perhaps the truckers’ strike will wake up the folks in Washington, D.C. to the plight of the hard-working folks trying to make an honest living as truckers and to acknowledge how vital they are to the U.S. economy.

Regards,
Ed Kim
riskyops.blogspot.com
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[i] Here are the links to the websites:
http://www.theamericandriver.com/files/wp/april_12_rally_pa.html
http://www.theamericandriver.com/files/wp/nationwide_shutdown_flyer.html
http://igtransportation.com/links.aspx
http://www.wpxi.com/news/15799233/detail.html
[ii] According to the EIA, approximately 46,645,142,880 gallons of diesel fuel (labeled as distilled fuel oil) was consumed in 2007. Relaxing the $0.244 tax on the distilled fuel oil would cost the U.S. approximately $11.4 billion

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Monday, April 21, 2008

A Proposal For Reducing Our Dependence On Foreign Oil

According the Lawrence Livermore Laboratory Energy & Environment Department’s 2004 study on U.S. Energy fuel source and uses as of 2002, nearly all of the oil that the U.S. imports is used for transportation (see chart). Therefore, the most effective way of reducing our over-reliance on foreign oil is to make the vehicles more fuel-efficient.
While making vehicles more fuel-efficient is nothing new, the method I propose to achieve this could be.

Proposal
1. Provide the U.S. automakers with a special government contract to build extremely fuel-efficient hybrid electric-gasoline flex-fuel vehicles for the U.S. Government, through the existing GSA vehicle purchasing program and through U.S. Postal Service. (According to the GSA website, the U.S. government purchases 60,000 vehicles each year. According to the USPS 2007 fact sheet, they own and operate more than 216,000 vehicles. Combined, they would provide sufficient critical mass for the automakers to build and sell extremely fuel-efficient hybrid electric-gasoline flex-fuel vehicles.)

Current technology permits building 100+ MPH plug-in hybrid electric-gasoline flex-fuel vehicles of all shapes and sizes for approximately $3,000 (small sedan) to $5,000 (SUV) more per vehicle. The government contract and grant will speed the mass building of these vehicles, even if the U.S. Government has to provide the cost difference of $3,000 to $5,000 per the hybrid electric-gasoline vehicle to the auto maker.

Based on the an estimate of 114,000 hybrid electric-gasoline flex-fuel vehicles a year (60,000 vehicles for the GSA and assuming replacement of 1/4 of the USPS fleet annually, or 54,000 vehicles), the annual grant to the U.S automakers will range from $342 million to $570 million. While this is a lot, it is far less than the $4 billion to $7 billion that we spend annually in grant and incentives to the corn ethanol program.

2. As a condition of the special contract, give the automakers financial incentives and grants to build new factories solely in the U.S. to build the new extremely fuel-efficient hybrid electric-gasoline flex-fuel vehicles. This condition will force the U.S. automakers to bring jobs back into the states that lost auto jobs to Mexico and Canada.

The U.S. government can reallocate 50% of the current spending on corn ethanol program to building new, state-of-the-art automobile factories (new parts factories and assembly plants) in the rust belts that are experiencing high unemployment. Based on the overall cost of the newest U.S. based automobile assembly plant – the Kia plant in Georgia, the cost of a new plant is approximately $1.2 billion. Once again, it is a large sum but, again, less than the current subsidy to the corn ethanol.

Diverting 50% of the current corn ethanol subsidy will result in $2 billion to $3.5 billion annually to building 100+ MPH plug-in hybrid electric-gasoline flex-fuel vehicles. At a cost of approximately $1.2 billion to $2 billion, it is conceivable to build two to three new automobile plants dedicated to building 100+ MPH plug-in hybrid electric-gasoline flex-fuel vehicles.

3. As a further incentive for buyers of the plug-in hybrid electric-gasoline flex-fuel vehicles, provide a government rebate, not tax credit, but a rebate similar to the 2008 tax rebate, say $3,000 per vehicle to every purchaser of a plug-in hybrid electric-gasoline vehicle. Make this rebate available to individuals and corporate fleets for the first three years of the program. (This tax rebate is better than the current tax credit of $250 to $3,400 for hybrid cars.

By making the government rebate of $3,000 per plug-in hybrid electric-gasoline vehicle available to everyone for the first three years, demand for these vehicles will be very high as the cost of owning these vehicles will be less than a comparable gas powered vehicle. Assuming an annual production of 200,000 cars per year for the first three years, the cost of the rebate may run about $774 million over three years (600,000 vehicles less 342,000 vehicles purchased by the GSA and USPS over three years, or 258,000).

4. After the initial start-up period of three years, expand the production of plug-in hybrid electric-gasoline flex-fuel vehicles into other states by building more assembly plants and ramp up production to meet growing demands.

According to a WSJ report, more than 15 million vehicles are sold every year.
The combined efforts of the government grants to the U.S. automakers and the a government rebate to the purchasers of the plug-in hybrid electric-gasoline flex-fuel vehicles would highly likely capture 10% of all vehicle sales, or approximately 1.5 million plug-in hybrid electric-gasoline flex-fuel vehicles. At an average MPG (miles per gallon) of 100, these vehicles would burn only about 25% of the gasoline of a comparable gas powered vehicle. In 2007, the average MPG of all vehicles sold in the U.S. up to October was 26.7 MPG. Assuming average miles traveled annually of 12,000 miles, this would result in a savings of approximately 112 gallons of fuel per vehicle a year, or 168.5 million gallons of fuel per year, overall[i].

Since it takes 1 barrel of oil to produce 19.5 gallons of gasoline, a savings of 168.5 million gallons of gasoline will result in the savings of 8.64 million barrels of oil, or about a day’s worth of foreign oil import. While this seems small, it is highly symbolic in that the U.S. is actually reducing its consumption of oil due to increased fuel efficiency.

Benefits Of The Proposal

  1. If 1.5 million cars sold in the U.S. were plug-in hybrid electric-gasoline flex-fuel vehicles , we would realize a savings of 168.5 million gallons of gasoline a year. This would reduce our CO2 output by 1.5 million metric tonnes, equivalent to CO2 absorbed by 1.86 million acres of 25-year old growth of trees[ii]

  2. Sale of 1.5 million plug-in hybrid electric-gasoline vehicles would result in an immediate increase in the overall average MPG from 26.7 MPG to 34 MPG[iii]. Tremendous increase in average MPG without using any C.A.F.E. measures.

  3. There is no need for any complicated tax credit formulae currently in place

  4. The U.S. Government can realize savings through elimination of the C.A.F.E. system, an overly complicated and bureaucratic system that penalizes rather than rewards automobile manufacturers. According to a 2004 Heartland Institute report, the cost of increasing the C.A.F.E. standard to 31.3 MPG for cars and 24.5 MPG for light trucks will costs a total of $3.6 billion. This does not even include the cost incurred by the government in legislating, drafting, and enforcing the regulations. Add in the cost of lobbyists on, both sides – pro and con - and this overall cost of the C.A.F.E. can easily top $5 billion

  5. This will not compete with the current ethanol program as the plug-in hybrid electric-gasoline flex-fuel vehicles would be able to use 100% ethanol, as production of ethanol ever reach critical mass
Regards,
Ed Kim
riskyops.blogspot.com
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[i] Calculation: 12,000 miles / 26.7 MPG = 449.4 gallons; 25% of this = 112.4 gallons; 112.4 * 1.5 million vehicles = 168,539,326 gallons a year saved
[ii] Calculation: 3,269,662,921 pounds of CO2 saved from 1.5 million plug-in hybrid electric-gasoline flex-fuel vehicle / 1,760 pounds of CO2 by 25-year old growth of trees (source: Tufts University) = 1,857,763 acres equivalent
[iii] Calculation: 15,100,000 vehicles sold in 2007in the U.S. less 1.5 million plug-in hybrid electric-gasoline flex-fuel vehicle = 13,600,000 vehicles. (13,600,000 vehicles x 26.7 avg. MPG + 1,500,000 plug-in hybrid electric-gasoline flex-fuel vehicle x 100 MPG)/15,100,000 vehicles = 34 overall MPG.

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Sunday, April 20, 2008

Risk Of Expanding The Afghanistan War

NY Times reported Friday that the U.S. Military Commanders in Afghanistan are requesting widening of the war to include full military attacks into Pakistan, an ally of the U.S. This is a seriously dangerous request, one that the Bush administration, in its rare moment of sanity has rejected.

The Military Commanders are requesting the expansion of the war into Pakistan because, in their view, the Taliban operating out of Pakistan are a threat to the U.S. forces in Afghanistan. C.I.A. director Michael V. Hayden goes even further by stating that the security along the Pakistan border “presents clear and present danger to Afghanistan, to Pakistan and to the West in general, and to the United States in particular.”

This is a dangerous way of looking at the situation in Afghanistan. It is a war in Afghanistan against Taliban, who have proven over a 9-year war with the Soviet army that it is tenacious, wily, and have an amazing power to regroup to conduct hit and run guerilla tactics; a tactic that the U.S. military taught them when they were fighting the Soviet Army. This is the very same tactic that they are employing now: hit & run, ambush, striking vital supply lines at its weakest point, melting back into the remote hinterlands where it is nearly impossible to find them, and crossing national borders to find refuge and to regroup.

If the U.S. Military expanded the scope of the war into Pakistan, it would result in a global condemnation of the U.S. and will fuel more individuals to join groups that are fighting our forces in Afghanistan and in Iraq. It will also force our allies to reduce their involvement as they face growing public pressure to stop helping an aggressor nation.

It is unfortunate that the U.S. Military doctrine has been tarnished to the point of being the world’s aggressor rather than the supporter of freedom and democracy. In the most recent Joint Chiefs of Staff National Military Strategy Plan for the War on Terrorism, page 5, the military lays out our goal on the war on terrorism: “The national strategic aims are to defeat violent extremism as a threat to our way of life as a free and open society; and create a global environment inhospitable to violent extremists and all who support them.”

This goal seems very idealistic and unachievable. It reads like something a na├»ve person would say when asked the question “If you had one wish, what would it be?” Defeating violent extremism and creating a global environment inhospitable to violent extremists are something that no nation in history has done and can do unilaterally. We simply cannot overcome human nature. Additionally, one of the founding purposes of the United Nations was to foster understanding and cooperative international efforts to bring global peace. Even with all their efforts, we have yet to make a dent in global violence and extremism. I don’t know when the U.S. Military’s mission shifted from national defense to being the U.N. but this should not remain the goal of our military.

If the U.S. Military does expand its war into Pakistan, then it will only result in the Taliban gaining more creditability as the “freedom fighters,” a designation given to them by President Regan. This will add to their numbers as more radials join their ranks. Moreover, it will ignite a war with Pakistan, a military power in the region, a confrontation that the U.S. cannot win since its forces are already at the breaking point with commitments in Iraq and Afghanistan. Finally, by chasing the Taliban into Pakistan will only force them further into other parts of Pakistan and perhaps into the Pamir Mountains, an area that is difficult to monitor and maintain.

So by bifurcating our forces into Iraq and Afghanistan, the U.S. lost its military advantage to finish the war against the terrorists in Afghanistan and found a stable government. Now, it is trying to gain lost grounds against the Talibans with an armed force that is already stretched thin. Given this, it is unthinkable for the U.S. to continue on its global war on terror, as its efforts in the Middle East has proven that instead of reducing the violent extremism, it has enflamed it even further.

Regards,
Ed Kim
riskyops.blogspot.com

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