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The insurgents (both sides) are getting top of line IED manufacturing material from all over the world, probably including arms dealers here in the US.
At one point, right after the fall of Baghdad, we had a chance. We needed to keep the Iraqi army intact, we needed to set up reconstruction USING IRAQIS for the contracts, we needed a force of 250,000 to patrol the streets and keep any idea of insurgency or sectarian death squads to a minimum. And above all, we needed to make it clear that we would be leaving by a date certain... that the Iraqis had to organize their nation in whatever manner they thought was right as quickly as possible, and that they needed a oil revenue sharing agreement in place between the factions. That would have had a chance of success, but only a chance.
Now, with the new rules of engagement, and with only as many troops in Iraq as 6 to 9 months ago, we have no chance. Expect to see not 3 to 4 American troops dead every day, but 12 or more, possibly much more. I expect that at some point, an entire American battalion, attached to an Iraqi army brigade, will be amBUSHed by 2000 or more insurgents. A Mogadishu moment writ large. That will be the end of the "surge". Hopefully THAT will be enough to bring an end to the Bush/Cheney presidency. Not that I want this to happen, but the wheels have been set in motion already.
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