After US and British coalition forces launched their first attacks in Iraq, another crescendo of anti-war voices arose around the globe. Nevertheless, US and British stock markets both celebrated with substantial gains. Most observers predicted the war would end quickly, thereby removing the factor of uncertainty and bringing an end to the bear market. Some experts are also encouraging investors to enter the market during the crisis. In fact, the rebound in markets around the globe since March 15 has merely resulted from resolving the uncertainty about when the war would begin. Continued concern about the war's effect on the world's future political and economic order still remains.
Since US President George W. Bush came into office, unilateralism has been the hallmark of US government policy. In light of the domino effect which resulted from tearing up several international treaties, such as the Kyoto Protocol regulating the emission of greenhouse gases, the US and British decision to go to war alone, while regrettable, is not unexpected. The UN may very well follow in the footsteps of the League of Nations and entirely lose its function of preserving world peace.
As an unrestrained superpower in the post-UN era, the US will be even more inclined to act willfully. Naturally there will be opposition to any kind of power, so more turmoil in the international order can be expected. As the war proceeds, the call from right-wing groups in the US and the UK for a boycott of French products will likely cause a popular movement in Europe seeking to take revenge on US companies.
The existing standoff over genetically modified foods is one possible arena for trade friction in the near future. Falling profits and the recent closure of a number of locations for McDonald's, the perennial target of anti-US protests abroad, also reveal the latent risks that US firms face in an atmosphere of worldwide anti-US sentiment.
Most reports analyzing securities markets have cited data from the previous Gulf War and the war in Afghanistan to point out that prior to the outbreak of war, economies and markets are surrounded by a haze of uncertainty and thus tend to be conservative. They note that oil prices rise on a sense of anticipation, while stock markets perform weakly. But once war breaks out, stock markets tend to bounce back. How long the rebound will last depends on whether the war is settled quickly or drags on indefinitely.
Such market analyses, which are based on inductive reasoning and pseudo-science in the guise of statistics, do not mesh with real experience. Actually, the structural factors underlying the US' economic woes -- including sliding consumer confidence and business spending -- are a continuation of overproduction in the electronics industry following the bursting of the high-tech bubble in 2000. To stimulate the economy, the US Federal Reserve has continually lowered interest rates, thereby prompting capital to flow out of the US. On top of this, there are the budget deficits brought on by large scale tax cuts for the rich and increased government spending, as well as massive long-standing trade deficits. All of these factors are working together to bring about a long-term weakening of the US dollar.
The various problems listed above have long existed. They are not a result of terrorism or the war in Iraq. It is utterly misguided to pin one's hopes on the war creating demand in the defense industry and thereby solving the problems of the US economy in the run-up to next year's presidential election. Such thinking will ultimately damage even the last harbor for capital, the bond market.
Preliminary estimates by various institutions put the cost of the Iraq war between US$100 billion and US$200 billion -- even if it ends quickly. That is 1 percent to 2 percent of US annual GDP. If the war drags on, the cost may reach US$2 trillion or even US$3 trillion.
There could be no war without a US government bond market. Because this war was not authorized by the UN, the US government must pay for its cost alone by issuing massive amounts of government bonds. This will send the US bond market, which has been bullish since 2000, into a slump. In the 1970s, the US delinked the dollar from the gold standard to pay for the massive cost of the Vietnam War. This caused the US dollar to devaluate due to oversupply. The oil-producing countries then raised their oil prices, causing global stagflation. History may now be repeated.
After the war ends, the US may demand that its allies share the cost of military action, humanitarian aid and reconstruction. This may aggravate the financial situation in those countries. On the other hand, the global political turmoil and trade disputes arising from the war may gradually lead to conservatism in both manufacturing and consumption. Interest rates, which have been at historic lows, will also put pressure on monetary policies and may detonate the deflation bomb at any time.
The recent fall in new housing construction in the US indicates that the real estate market bubble is also reaching a dead-end. Given the long-term risk of both the stock and bond market slumps, everyone should think hard about whether the recent rally is the prelude for a stronger rebound.
Pan Han-shen is a securities analyst at E Sun Securities.
Translated by Ethan Harkness and Francis Huang
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