The Coming Great War
How It Will Affect Your Investments By Richard J. Maybury
Blanchard Investment Conferencehttp://www.richardmaybury.com/chaostanA.html
New Orleans, Louisiana
October 17, 1998
Richard Maybury was asked to speak at the Blanchard Investment Conference in New Orleans on October 17, 1998. The late James U. Blanchard is famous for being at the leading edge of economic and investment developments. His annual conference is the oldest and largest, noted for hosting top financial and political speakers such as President Gerald Ford, Nobel economist Milton Friedman and philosopher Ayn Rand. Mr. Maybury's speech was immediately preceded by that of best-selling investment author Douglas Casey, and immediately followed by that of former British prime minister Margaret Thatcher.
A popular joke a few years ago asked why it took five years for Alan Greenspan's fiancé to say yes after he proposed marriage to her. The answer was that it took her that long to figure out what he was saying.
Well, now we know what he was saying when he talked about Americans not paying attention to risk. Since the Russian financial crisis began this summer, Americans have watched their wealth disappear at the rate of a half trillion dollars per month.
But, to readers of my newsletter, there's nothing surprising about this global crisis, and that's why Jim Blanchard asked me to be here, to explain to you how we saw it coming and what we expect next.
This afternoon I will give you the big picture, then at my workshop at 6:20 PM, I will provide specific investment tactics to earn profits and avoid losses.
The Chaostan Model
The story begins in 1981 when I wrote a special report called "The Thousand Year War" about the conflict between the Islamic world and the Christian West. The so-called "terrorism" we see today is just the latest chapter in this war that's been going on for a thousand years.
That report 17 years ago was the beginning of what is now called the Chaostan model.
See Figure 1.
I coined the term Chaostan in 1992, predicting that the area from the Arctic Ocean to the Indian Ocean and Poland to the Pacific, plus North Africa, would erupt into a huge economic crisis, and a war that would eventually be known as the next world war.
How did I come up with the name Chaostan?
In Central Asia, the suffix "stan" means "the land of." Afghanistan is the land of the Afghans. Kazakhstan is the land of the Kazakhs.
Chaostan is the land of chaos.
Last year, I wrote an article called "Our Frightening Heap of Profits." I told my readers that the enormous profits we had been earning from the Chaostan model—in some cases more than 1,000 percent—were wonderful, but they were not good news because they probably meant the model was correct and the Chaostan volcano was starting to erupt.
As you know, today we see continual headlines about the "global crisis" emanating from Russia, Asia, Africa and East Europe—from Chaostan.
History repeats, and I'm afraid the Iraq-Kuwait war in 1990 was the beginning of what will someday be known as the next world war.
I'm afraid this is only the beginning.
A good way to understand the Chaostan model is to start with a question:
When did World War II begin?
A lot of Americans will say December 7, 1941 with the attack on Pearl Harbor.
Actually the war had been going on for ten years before it was recognized as a world war. The true beginning was in 1931 with Japan's attack on Manchuria, followed in 1935 by Italy's invasion of Ethiopia, the Spanish Civil War in 1936, and many other wars that eventually merged into one big war.
Presently there are 24 wars in the area I call Chaostan, and another 20 conflicts are barely contained and could erupt at any time. There's Kosovo, Sudan, Kashmir, Kurdistan, Armenia, Azerbaijan, Afghanistan....the list goes on and on.
History repeats, and I'm afraid the Iraq-Kuwait war in 1990 was the beginning of what will someday be known as the next world war. I don't think it will be as bad as World War II, probably something on the scale of World War I because it will be mostly guerrilla war.
How will it affect the economy and your investments?
Background and History of Chaostan
As you can see by Figure 1, Chaostan is roughly a third of the earth's land surface. It contains a huge portion of the total world supply of natural resources, including a lot of gold, silver, platinum, copper, iron, timber, zinc, grain and at least 80 percent of the world's oil. I think supplies of these raw materials will be reduced or even cut off entirely, so prices of these investments will soar.
To understand Chaostan and this new world war, we must first understand the two lines you see in Figure 2.
For the next few minutes I'm going to get into some ancient history and you will wonder what it has to do with your investments, but be patient, the light will dawn in about 10 minutes or so.
These are the most important lines you will ever see.
Line A represents the "standard of living" or "quality of life" of the typical individual in western civilization. This can be measured however you wish to measure it—life span, infant mortality rate, medical care, amount of food, speed of transportation, whatever.
Line A is the line we've all been taught. We leave school thinking civilization advanced slowly but steadily from the stone age, over thousands of years, until we reached our present high level today.
Virtually all political and economic decisions around the world are made on the assumption Line A is correct, and most investment decisions are made on the assumption Line A is correct.
But it's not. Line B is the real line. Nearly all progress happened recently and suddenly. The typical individual in 1500 AD lived little better than in 1500 BC. Things didn't get significantly better until the great takeoff just a short time ago.
I'll give you three examples to make Line B and the great takeoff real for you.
First example. For all of history until just a short time ago, millions of people were killed by their beds. You see, one of the most serious problems humans have always had until the great takeoff is, how do you make a bed that's comfortable but isn't a place to breed disease-carrying mice, Line B is the real line. Nearly all progress happened recently and suddenly.
rats, fleas, ticks, lice, and bedbugs? Line B is the real line. Nearly all progress happened recently and suddenly.
People tried everything—straw, cotton, wool—but nothing
worked. Beds were filled with disease, and every night when you went to bed you knew you might be committing suicide, because you didn't know what was living in that bed. Until the great takeoff. Someone invented the inner spring mattress, which contains nothing but steel and air. Mice and fleas and so forth cannot live inside an inner spring mattress. A lot of us would be dead were it not for the inner spring mattress, but we are so far removed from the way our ancestors lived that we never think about it.
Second example. Until the great takeoff, millions of people died from tooth decay. You see, cavities kill if they are not treated. During the Middle Ages, a demographer named John Graunt found that 5% of the deaths in London were due to tooth decay. My wife's grandmother died of tooth decay. But to us today, tooth decay is a minor nuisance. We rarely think about it unless we see a TV commercial about toothpaste.
For all of human history until recently, everyone lived at or just barely above the base line of human existence.
Third example. For thousands of years, a woman had to give birth to nine children, just so that two would live until maturity. Children were killed by smallpox, freezing, typhoid, cholera, starvation, influenza, you name it. Today we all expect to attend the funerals of our parents, but not the funerals of our children. Until the great takeoff, the typical mother and father had to go to their children's funerals seven times. Try to imagine what that was like.
Look back at Line B. For all of human history until recently, everyone lived at or just barely above the base line of human existence.
What happened to cause this sudden, dramatic takeoff? What year did the sharp escalation begin?
You'll notice I've put a question mark at the take off point. Take your pencil, scratch out the question mark and write in 1776.
Almost everything we have was developed after 1776. The growth in our standard of living has been explosive. We have electric lights, television, radio, cars, planes, steamships, telephones, computers, antibiotics, tennis shoes, typewriters, microwave ovens, air conditioning, central heating, heart transplants, digital watches, calculators, railroads, flush toilets, electric drills, showers, fax machines, ballpoint pens, plywood, tin cans, toothpaste, plasterboard, stereo music, refrigerators, and on and on.
Almost everything we have was developed after 1776.
All of it developed after 1776.
The typical middle class American today lives vastly better than an Egyptian Pharaoh, better than a Roman emperor, better than a medieval king.
Why Did the American Revolution Have this Effect?
The answer is the explanation of Chaostan, and it begins, as almost everything in today's political world begins, in ancient Rome.
After Roman civilization in Europe fell apart around 500 AD, the Roman legal system died along with the Empire, so Europe had no law. Two people who had a dispute had to work it out on their own. Their feudal lord seldom paid much attention; he didn't care as long as the taxes kept rolling in.
So, when a dispute occurred, often there was bloodshed.
In the effort to avoid this bloodshed, participants in disputes would increasingly call on neutral third parties to hear both sides of their stories and make decisions.
Usually the most trusted person in a community was a clergyman, and some clergymen made careers of hearing disputes and making judgments. They became judges.
Being clergymen, these judges' decisions in each case were based on religious principles such as "Thou shalt not steal," and "Thou shalt not kill."
Decisions were preserved in writing as precedents for later decisions. This collection of precedents became a body of "case law," meaning law derived from actual cases.
But there was one problem. Often people were from different religions. Which principles should a judge apply?
Judges hit on the idea of using the principles all religions hold in common. There are two:
(1) Do all you have agreed to do. This became the basis of contract law.
(2) Do not encroach on other persons or their property. This became the basis of tort law and some criminal law.
These two laws taught by all religions were held to be common to all persons and they became the foundation of the body of precedents called Common Law.
But there was another problem. Governments hated the two fundamental laws. They wanted the privilege of breaking agreements, stealing, killing and doing whatever else they pleased.
This is the meaning of the so-called "divine right of kings." Governments declared that God had given them the special right to violate the two fundamental laws.
Governments declared that God had given them the special right to violate the two fundamental laws.
Thanks to the divine right of kings, the heavy taxes, regulations and wars kept the people in crushing poverty.
In England, a huge underground economy sprang up to escape the taxes and regulations.
Finally, after 1492, people began to cross the ocean to America to escape their governments, and England's underground economy was transplanted to America where it flourished. Virtually every adult in colonial America was engaged in smuggling or tax evasion of one sort or another.
By 1765, with very little taxation or regulation, Americans had become the wealthiest people on earth.
Government officials in England decided to steal some of this wealth, and they sent tax collectors.
The tax collectors were tarred and feathered.
So they sent troops to protect the tax collectors, and the American Revolution began.
After the revolution, Americans set up a new government with a Constitution and Bill of Rights based on the two fundamental laws. 1
Virtually every adult in colonial America was engaged in smuggling or tax evasion of one sort or another.
The size and power of this new government were severely limited, and its ability to steal, or tax, was reduced almost to zero. Until the 20th century, the US government was so small, it was supported only by import taxes and taxes on liquor and tobacco. There was no income tax.
America became a haven for flight capital as people all over the world began investing their money here. The Americans themselves were able to keep nearly all their income, and save and invest in their own businesses.
Jobs were plentiful, and inventors such as Thomas Edison and Eli Whitney were able to acquire funds to develop a vast array of new machines to make life better. This is where we get the term "American ingenuity."
Question: Why was the Battle of Lexington called the Shot Heard Round The World, not the Shot Heard Round America?
The rest of the world saw America's great wealth and liberty, and they wanted it, too.
An economic system is the result of its legal system... That's the most important investment principle.
The principles of the American Revolution began to spread, and the nations where they were established, came to be known as the "Free World."
These nations are also the richest, because an economic system is the result of its legal system.
That's the most important investment principle. An economic system is the result of its legal system. Before you invest in anything anywhere, check out the legal system of that country. To help you do that, on our web site you will find an explanation of legal systems, and a list and short description of the legal systems of nearly every country in the world.
An economic system is the result of its legal system. Rational law leads to economic advancement, and irrational law leads to chaos.
Chaostan—the land of the Great Chaos—is the most important area that never developed legal systems based on the two fundamental laws.
How Chaostan Will Affect Your Investments
Since the beginning of history this area has been inhabited by hundreds of nations, tribes and ethnic groups that have hated and fought each other constantly. Russia alone contains some 250 of these groups, and they know nothing of the legal principles that make an advanced, peaceful civilization possible.
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Until 1991, the Kremlin sat on Chaostan like a lid on a pressure cooker. Now the lid is gone and the explosion has begun. The area is returning to its original condition of poverty and war—of chaos.
My forecast is simply that this economic crisis and these 24 wars in Chaostan are the beginning of what will someday be known as the Third World War. It will be great for weapons stocks and security equipment stocks, due to terrorism, and non-Chaostan oil investments.
Chaostan contains a huge portion of the world's raw materials, so I think raw materials, including gold, silver and platinum, will be to the next decade what high-tech was to the 1990s: the new glamour industry.
My guess is that this coming raw materials boom will last ten years or more. You will find my full explanation in the March 1998 issue of my newsletter which you can get by calling 800-509-5400. Again, that's the March newsletter, and the number is 800-509-5400. The number is also at the bottom of your handout.
I'll talk more about raw materials in my workshop at 6:20 PM.
In the workshop, you will get a free map of Chaostan hot spots, and we'll go over these hot spots to uncover the specific hidden dangers and opportunities. I'll suggest ten investments that I think will perform like those you see in Figure 3 of your handouts.
A few years ago, I wrote that all of Chaostan would eventually look like the movie "Road Warrior" starring Mel Gibson. Sometimes that movie is referred to as "Mad Max." If you haven't seen it, I urge you to rent it. It's become almost a documentary about Chaostan.
I'll give you a Mad Max update. Areas of Chaostan that have now become like that movie are: Algeria, Sudan, Somalia, Kosovo, Albania, eastern Turkey, northern Iraq, Afghanistan, Georgia, Armenia, Azerbaijan, parts of Pakistan and parts of Indonesia. And Russia, with its 30,000 nuclear warheads, is right on the brink.
One caution I will leave you with is, if you follow someone's investment advice—your broker's or anyone else's—be sure he or she understands Chaostan.