How great an effect will the terrorist attacks in the US have on the global economy? In financial terms, the factors affecting markets may be divided into the psychological, the fundamental and the technical.
Psychologically speaking, the aim of this terror attack was not to warn, threaten or provoke, but rather to seek revenge and destruction, and that is the reason why it was America's economic and political centers that were the targets. That is also the very reason why one can reasonably foresee that the psychological blow inflicted by an armed attack on American soil may lead to changes in US foreign, defense and security policies.
More directly, it is a blow to considerations of personal security. Once something like this happens, it inevitably affects consumer confidence, even further slowing the steps toward a revival of the economy. It must also have a negative effect on investment prospects. Such a psychological blow to the general sense of security will add frost to the snow of the already exhausted American economy, and it will affect economic fundamentals.
It is difficult to estimate the losses caused by such a severe blow to New York -- which is the US, if not the world's -- financial, commercial and tourist center. Once the protective instinct kicks in, it will have a substantial effect on commercial and tourist demand and cause a continuous shrinking of consumption and investment.
The only possible off-setting factor will be the need for reconstruction, including that for networking, information, communications and office equipment to enable multinational corporations to return to operations, but this will be dependent on the speed of reconstruction. Given that New York City is an important business hub, there is a need for quick decisions to restore commercial functions and operating mechanisms -- even though the question of whether to rebuild the 100-plus story skyscrapers will require extensive consideration. Tangible influences on economic fundamentals will be the negative factors resulting from a loss of confidence and the positive factors resulting from the need for reconstruction.
The interaction of psychological and tangible effects will have a direct positive impact on the technical effects, and this will be amply displayed through the shock to financial markets. These terrorist attacks have led to the longest non-holiday closure of the US stock markets ever, showing the extent of the harm to the information, communications and office facilities which are necessary for the financial markets.
The market's closures highlight the degree of destruction inflicted on New York's financial system, and only after they reopen today will a correct estimate of the losses sustained by financial and commercial activities begin to be possible. Without any data, however, the psychological blow must create a tendency in the markets either only to buy or only to sell, and it must also lead to an excessively bullish or an excessively bearish situation. This is the very reason why the US dollar is depreciating and share prices are falling, while gold and oil prices are rising.
It is obvious that the rise and fall of these financial and commodity prices are affected by psychological factors, and this often leads to rises and falls outside of normal fundamental reactions. This kind of excessively bullish or excessively bearish market will be corrected by the gradual appearance or completion of information.
Often, the rebound will also exceed normal levels, which is exactly what is meant by an "over-reaction." Prices will repeatedly swing back and forth between excessive rises and falls, only to slowly regain balance. Based on this kind of technical price reaction, unless the direction and scope of these sensitive prices have been very clearly predicted, it will be much better to wait and see and let things settle down before reacting, instead of reacting too strongly, too soon.
The prediction that the US dollar will depreciate as a result of these attacks may be correct. As expected, a one-sided sale of the dollar is taking place in the markets, causing it to depreciate, but very soon the question will arise of which currency the dollar should depreciate against.
Once that happens, we will likely find that there is actually not very much room for the dollar to depreciate, and that there are not even all that many "opponents" to the dollar. It will then stop depreciating and regain stability, or even appreciate. The prediction that the greenback must depreciate can therefore only have a shelf-life of a couple of days.
According to the same reasoning, the explosive rise in oil prices is just an immediate response, and a result of psychological factors. Looking at the global economic downturn, however, oil-producing Middle Eastern countries friendly to the US, including Kuwait and Saudi Arabia, will necessarily stand on the side of the US and its allies, and when necessary raise oil production. This will lead to a fall in high oil prices, and the fluctuations in the gold price will go the same way.
Apart from the tangible influence of the fall in consumer and investment demand resulting from psychological insecurity, the retardation of economic recovery, exchange rates and prices of shares, gold and oil will be adjusted through large upward and downward swings. Since the US' position as the world's economic power-house has not changed, however, prices will return to their original trends after a short period of fluctuation and there will be no major change.
Chou Tein-chen is a professor of economics at National Taipei University.
Translated by Perry Svensson
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