Wednesday, May 10, 2017

Jim Rickards on Potential for War with North Korea

A full transcript text of Jim Rickards interview in April with Alex Sanczyk is now available here. Jim talked more about geopolitical issues in this discussion than usual. Since Jim has good contacts on this kind of topic and since North Korea is certainly a problem that dominates the news now, below is a portion of a Q&A on what Jim thinks about it.

Alex: "Speaking of North Korea, President Trump has ordered a U.S. carrier group to steam in the direction of the northwest Pacific in the vicinity of North Korea. The carrier group consists of the USS Carl Vincent (a Nimitz-class nuclear powered aircraft carrier), a Ticonderoga-class guided missile cruiser, two Arleigh Burke-class guided missile destroyers, and an unknown number of submarines.
North Korea’s response has been a threat of nuclear attack on the United States. That’s not anything new; they’ve been saying that for a long time now. And also, they’re warning that their nuclear capability – if we can call it that and is of a much greater concern in my opinion – is targeting U.S. military bases in South Korea.
Trump’s comments regarding China’s role in theater were that it would be better if China solved the North Korea problem themselves. He tweeted out that if China decides to help, that would be great, but if not, we will solve the problem without them.
Do you see this simply as strong talk, or given the action in Syria, do you think Trump is prepared to back that up? What does it mean for the overall Korean theater? And as a follow-on, how does this affect the rest of the world?"                                                                                                                        
Jim:  "I followed it closely and don’t see any of this as just talk or even strong talk. I think it has real potential to spin out of control and do something; certainly a possibility of nuclear war with Korea and maybe something much worse as I’ll talk about in detail.
By the way, I’m not sure if all the listeners know about your own military background and expertise, and I appreciate that rundown of the elements of the aircraft carrier strike force.
. . . . . .
Let’s start with Kim Jong-un, the leader of North Korea.
I’ll distinguish for the listeners the difference between a nuclear device and a nuclear weapon. A nuclear device is when I take fissile material, create a controlled chain reaction, have some detonators, let it explode, and I get an atomic explosion. This can be detected with seismographs, intelligence sources, and other technical means.
There’s no doubt that North Korea has that. They’ve detonated a number of these nuclear explosions. They have highly enriched uranium and plutonium, which is fissile material. An atomic bomb can be made out of either highly enriched uranium or plutonium. It’s estimated that they have enough for 10 weapons.
They’ve mastered the enrichment cycle, have fissile material, and shown they can blow it up. That’s all pretty bad, but the next step is to weaponize it. Can they take that fissile material and put it in the form of a weapon that furthermore could be put on a warhead or missile?
These devices are the size of trucks. You could put it on a truck and drive it around, but where are you going to go with that? They can’t, so they have to weaponize it. They have to do something else, which is they have to ruggedize it.
‘Ruggedize’ means to strengthen for better resistance to wear, stress, and abuse. Even if they have something that’s a weapon that will work and detonate in a warhead, they have to shoot it into space. There is enormous stress during the liftoff phase, then it goes into space, and then it must re-enter the atmosphere. It needs a heat shield. It has a very rough ride before it reaches the target, so they have to weaponize and ruggedize it.
The evidence is that North Korea is very far along in that. I won’t say they’ve mastered it, but they’ve put some models on display which experts have looked at and said, “Yes, it looks like they know what they’re doing.” Who knows exactly where that is, but no reason to think that they’re not pretty far along.
The other thing they need is a missile that can reach a target. They can get South Korea because they have fairly reliable short-range missiles. The next step up is intermediate-range missiles that’ll go out maybe 500 to 1000 kilometers and be capable of reaching all of Japan and parts of China.
That’s been hit or miss – no pun intended – but they do seem to have nearly mastered that technology. They still have times when it blows up on the launchpad or it launches, goes off course, and lands who knows where.
It’s not clear how much of that is imperfect technology on their part and how much might be sabotage on our part. Let’s hope it’s the latter. Actually, let’s hope it’s both, but they seem pretty far along in intermediate-range missile capability.
The last leg of that triad is an intercontinental ballistic missile. This is the one that could hit Los Angeles or a lot of big cities in the United States. It’s much longer-range, has to go into space, and come back again. It doesn’t go into orbit, it’s kind of a suborbital ballistic path, but it’s very long range. They have not mastered that although they’re trying and making good progress.
So, where do we stand? They have the enrichment cycle, the fissile material, and the ability to create atomic explosions. They have short-range to intermediate-range missiles and are working on miniaturization, weaponization, ruggedization, and ICBMs.
They’re not that far away and seem to be making very good progress. They are probably four years at most, maybe three years, from being able to fire an atomic weapon at Los Angeles and kill 3 or 4 million Americans. That’s the capability.
Whenever you do this strategic analysis, you have to look at capabilities and intentions. If you know the capability, then all the talk in the world doesn’t mean anything if you can’t do it. If you do have the capability, you still have to ask about intentions. India has nuclear weapons and missile capability, but do they intend to strike the United States? Nobody thinks that.
It’s a combination of the two, capability and intentions. They’ve come very far down the capabilities path and are getting dangerously close to being able to nuke L.A.
Now let’s talk about intentions. Kim Jong-un has stated his intention to attack the U.S. with nuclear weapons. I see no reason not to believe him. He doesn’t quite have the capability yet, but that’s a dangerous combination.
What is he thinking? It’s impossible to know. One line of analysis I’ve read recently, which is not reassuring, is that he’s actually crazy. It’s probably the worst possibility when you have a crazy guy with nukes.
Maybe he’s one of these people who’s very cagy, not crazy but acts crazy to keep everybody off guard, something called strategic ambiguity. Going back to World War I case history, it’s the confusion about other people’s intentions that causes strategic miscalculation. Jong-un is looking around the world and saying a couple of things.
Let’s look at different nuclear weapons programs in rogue states. Iraq was working on nuclear weapons programs. Again, they didn’t have them when we went in, but they were working on them as evidence clearly shows. They gave it up, and Saddam Hussain got hanged. Gaddafi in Libya was working on a nuclear weapons programs. He gave it up and he got a bullet in the eye. The lesson is, if you have nukes and you give them up, you get killed.
The Iranians are working on a nuclear weapons program and they’re still standing. Kim Jong-un’s takeaway is, “If you work with the United States and give up your nukes, you get killed. If you keep your nukes, they don’t mess with you.”
It’s a totally bad message and major blunder the U.S. foreign and military policy has created in three cases – Iraq, Libya, and Iran – where if you work with us and give up your nukes, you get killed, but if you keep them, we don’t mess with you. That’s the wrong message, but it’s what we sent, and that’s what Kim Jong-un has internalized, so he’s saying, “All right, I’m going to keep going on the program.”
I’ve done a lot of work on North Korea. It’s an illegitimate regime, a brutal regime, a thuggish regime run like a crime family. They actually sent a cable to their embassies saying, “All you embassies, we don’t have the money to pay for you, so you have to pay your own bills. We suggest you do it with criminal rackets like counterfeiting or drug smuggling in diplomatic pouches.”
It’s run like the mafia with the same ethic of the mafia, which is basically to kill anyone who looks at you cross-eyed including your own family members. That’s the best way to understand what’s going on there.
The first thing Kim Jong-un is thinking is to keep going with the nuke program because the U.S. won’t mess with him. If he actually perfects it meaning he has reliable ICBM technology, miniaturization, and all the things we just talked about, he’ll think, “You definitely won’t mess with me. If you do and you don’t disable the whole program, I will send a nuclear missile to Los Angeles and kill millions of Americans, so good luck with that.”
The second thing he’s thinking is, again, being illegitimate – how to keep this thing going. How do you keep any racket going? Well, the main way you keep the racket going is to pay your people, but how does he earn hard currencies? He’s been shut out of the banking system; he’s been de-SWIFTed.
As a quick footnote on that, SWIFT is fundamentally the central nervous system of the international banking system. It’s a message traffic system run in Brussels where all the big banks in the world exchange money. When Deutsche Bank is sending a billion dollars to Citibank, it goes through SWIFT. When someone is exporting an oil tanker and waiting to get paid however many hundreds of millions of dollars for the cargo, that goes through SWIFT. Whether it’s dollars, euros, Swiss francs, yen, etc., all that message traffic goes through SWIFT.
In 2012 during what I call the first Iran-U.S. financial war, we worked with our allies to what we call de-SWIFT Iran or kick them off the SWIFT payment system. They could ship all the oil they wanted but couldn’t get paid.
North Korea is the second country to be de-SWIFTed. It’s a pretty extreme remedy much like cutting off oxygen to a patient in an intensive care unit; they’re probably going to suffocate. That’s what’s happened to them.
There are ways around that, however. They can use front banks. Maybe a Chinese bank is willing to send message traffic, wire transfers really, on behalf of North Korea without disclosing the beneficial party.
You’re supposed to disclose. There are forms – MT201s and so forth – where you put the sender, recipient, account information, amount, currency, all that stuff. There’s a line at the bottom for beneficial holder if you’re acting as an agent for somebody else.
Leaving it blank is one kind of fraud. The Chinese might leave those blank for North Korea and the Russians. I just saw the other day that the Malaysians have been doing something similar.
Be that as it may, the U.S. obviously knows this as part of our intelligence gathering. Going back to the escalatory dynamic, what we’re saying to the Chinese banks is, “If you front for North Korea, we’re going to kick you out of the U.S. payment system.” That’s a big deal, because these Chinese banks obviously need access to the dollar payment system.
That’s really putting the screws to North Korea. I’m sure that’s what was discussed in part between President Trump and President Xi at the Mar-a-Lago summit a few days ago behind closed doors which is, “We’re about to get serious, and we will put pressure on you directly if you don’t help us.” Trump has been tweeting about this. He leaves out the details, you can only do so much on Twitter, but it’s pretty clear what’s going on.
As another aside, the way North Korea gets money to pay their people is by selling weapons to Iran. North Korean scientists are further along than the Iranian scientists. Iranians have the enrichment cycle down, and they’re under a lot of scrutiny. Their missile program is coming along, but the North Koreans seem to be further along than the Iranians with all the technological items I mentioned – weaponization, ruggedization, miniaturization, ICBMs – so the North Koreans are selling their technology to the Iranians. That’s a separate story I’ll save for another day, but they’re getting paid in gold.
This is why there’s very strong physical demand for gold. Something that has emerged that I’ve written about for one of the think tanks in Washington is what I call the axis of gold involving Iran, China, Russia, and Turkey, and I would include North Korea as an auxiliary member.
The story of Russia and China acquiring gold as an alternative to the dollar, to build up their reserves as insurance against inflation, and all the reasons any investor might want gold, which all apply, is a big story. We’ve talked about that a lot in the past, but there’s another reason, which is to avoid sanctions or interdiction.
Physical gold is not digital, you can’t hack it, you can’t erase it, you can’t interdict it. It doesn’t go through SWIFT. You just take the bars, put them on a plane, and fly them to Shanghai, Pyongyang, Moscow, Teheran or wherever they happen to be going. You need very good intelligence to know where it is, and even then, are you going to shoot down a plane? Probably not, so that gold gets around.
It’s how these guys are paying each other outside of the message traffic system that is de facto controlled by the United States. There’s a big demand for gold coming from that vector. North Korea is getting gold they can use to bribe people and pay them off or to buy other things.
It can be used it to buy imports, and they like luxury goods. The North Korean military leaders, intelligence assets, and the people Kim Jong-un has to keep happy like their fancy watches and fancy cars as much as anybody. You can import that stuff with gold, so there’s a gold trade going on there.
Kim Jong-un has two big reasons to keep his program going:  1) He believes that if he perfects it, the U.S. won’t mess with him and he can perpetuate his regime, and; 2) He can sell the technology for gold to keep his people happy and protect his regime. He’s like the Godfather sitting up there.
The problem is, the United States is not going to allow him to nuke Los Angeles. He might say, “I just want the capability so you guys won’t mess with me,” but the answer is, “No, you’re not going to get the capability.”
You can’t gamble with Los Angeles. You can’t even take a 1% gamble with Los Angeles. You can’t even take a fraction of 1%. This is something Dick Cheney called the 1% doctrine, which meant that when the risks are existential, you can’t take even a minute fraction of 1%. You can’t make that bet; you have to eliminate it.
Kim Jong-un is on a course to get the weapons, and the U.S. is on a course to prevent him from getting the weapons. Each side misreads the intentions of the other. Now, here’s where it gets really interesting and I think war could be imminent:  How do you actually root out this program?
There’s an old saying, If you shoot the king, don’t miss, meaning if you try to assassinate a leader – shoot the king, in other words – and you miss, you’re dead. They’re going to come back to you.
This is what happened with Hitler and the Wolf’s Lair plot when they actually got a briefcase bomb two inches from Hitler. It blew up, but the briefcase had been moved behind an oak panel at the last minute. Hitler was injured and wounded but not killed. Of course, that was bad news for all the perpetrators, because they all got killed.
If you shoot the king, don’t miss, so if we, the United States, are going to take out the North Korean nuclear program, we must get it all. We can’t leave them with any fissile material, any missile launch capability, any reactors, etc., because they’ll just come back and get us.
There are ways to do it. I’ve been talking about the ICBM in Los Angeles as the existential threat, but they could unleash a military barrage on Seoul. I’ve been to Seoul a number of times, and it’s very close to the North Korean border.
It would be nicer for them if they were down around Busan or someplace further away, but they’re not. They’re well within artillery range. I’m not talking about bomber range; I’m talking about artillery range of the North Korean border, and they will be massively bombarded. Then North Korea could use even their short-range missiles to attack U.S. bases in Korea and the region.
Even if they can’t reach L.A. because we hit them before they can get the ICBM, they can easily kill a lot of Americans in the region. That’s exactly what they’ve threatened to do and have the capability of. If we hit them, we have to take out everything, or else the retaliation on us, the South Koreans, probably the Japanese, and others will be pretty horrendous. So, if you shoot the king, don’t miss.
What does it mean when I say don’t miss? The North Korean stuff is underground buried in mountains and heavily fortified. We do have GBUs (bunker buster bombs) and have been working on that, but if we give them more time and let them burrow in deeply and dig more tunnels, we might have to use tactical nuclear weapons.
Now, atomic weapons. I’m switching back and forth between atomic and nuclear weapons to distinguish between Hiroshima-type bombs and thermonuclear devices, which North Korea is not even close to getting. Russia and United States have them.
Atomic weapons are the kind used in Hiroshima and Nagasaki. August 1945 was the last and only time these weapons were used in warfare, but obviously, they’ve been tested up until the 1960s.
There are some smaller-yield, tactical nuclear weapons called sub-nuclear, which are pretty powerful. They get up to a certain critical stage and unleash a lot of energy. I don’t want to get too technical on all this, but the point being, those are obviously more powerful than the bunker busters.
Will we have to use those to wipe out the North Korean program to make sure if we shoot, we don’t miss? All I know is the more time that goes on, the more likely that becomes. If you’re the United States and are saying “We don’t want to use tactical nuclear weapons, because that crosses a separate red line that gives Russia permission to use them elsewhere,” then you’d better act sooner rather than later.
Here’s the dynamic:  Kim Jong-un is on a course where he says, “I’m keeping my nuclear weapons to perpetuate my regime and so that the U.S. won’t mess with me.” The U.S. is on a course that says, “We have to take out your program sooner rather than later because it’s an existential threat.” That’s a recipe for war sooner rather than later.
My view is we’re on that course. This is not saber-rattling or bluster or talk. Just to connect the dots all the way back to Syria, Trump has shown that he’s decisive and is willing to shoot.
Not to be glib, but when you have a forward-deployed military with as much weaponry, technology, and capability as the United States, the generals don’t totally mind taking out a Syrian airfield. In some ways, it’s target practice.
Again, I’m not being glib; I’m just saying that when you have all this stuff, you have to use it every now and then to make sure it works, and you know that very well. So, the military is primed. They had a nice live-fire exercise in Syria. Trump has shown he’s decisive. We’re on a collision course with North Korea.
To cut to the chase, this is one of the drivers of gold right now with physical gold prices in particular in addition to the other things we mentioned. I think the gold market and the smart money has this figured out. Institutional investors and retail, unfortunately, are usually the last to know, but I think some of the hedge funds, some of the sovereign wealth funds, and some of the big players are going to gold because they see this happening."

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