After the shock and horror, disbelief and anger subside; after the death and destruction are assessed and assimilated; and once US financial markets reopen for business presumably today, the US will get back to the business of the US,which, after all, is business.
The twin towers are no more, victims of a well-coordinated terrorist attack utilizing hijacked planes as missiles. No one who witnessed the crumbling of the two tallest buildings in New York City, which towered over the financial district as a symbol of everything that was possible in the US, will ever be the same.
Still, to change our way of life, to cower in response to terrorism, would give undeserved power to those who inflicted the damage. Life will go on, even as loss lingers.
The sophisticated, precisely orchestrated attack, with four fuel-laden jetliners taking off from East Coast airports for transcontinental flights, hit with the US economy already in a vulnerable position. The economy expanded at an anemic 0.2 percent annualized pace in the second quarter. Following Friday's reported spike in the unemployment rate to 4.9 percent in August from 4.6 percent the month before, economists marked down their outlook for economic growth, their target for the federal funds rate and the odds a recession could be avoided.
With the latest attack at the heart and pulse of New York's financial district, the fear is that the consumer, who has been holding the economy together with stickpins, will retrench. In other words, adios to slow growth, hello recession.
The financial futures market voted sharply and swiftly, expressing its view that the aftershock would force the Federal Reserve's hand quickly. In Asian trading last night, the implied yield on his and next year's eurodollar futures contracts, traded on the Simex, plummeted 23 to 42 basis points. The December 2001 contract closed at 2.9 percent, implying a funds rate of about 2.75 percent by year-end.
In deference to the tragedy, most economic research departments refrained from instant analysis on Tuesday. By yesterday, first thoughts were starting to trickle out.
Most of the focus was on the demand side, as it is with all supply shocks. Wall Street, well-trained in demand-side Keynesian economics, pretty much ignores the supply side, except when it's not applicable. (When OPEC increased oil production by 3 million barrels a day as crude oil soared to US$$37 a barrel last year, this was deemed a "supply shock" even though increased demand pushed prices higher.) The loss of productive capacity as a result of the attack will be less than if the facilities involved produced capital equipment. The nature of Wall Street's business is financial services, which can be provided from alternate locations or electronically. The ability to produce will be more seriously impaired by the loss of human capital than physical capital.
Like all supply shocks, this one will raise prices: specifically, the cost of doing business.
"You thought it took a long time to board an airplane before this happened?" asks Paul Kasriel, director of economic research at Northern Trust Corp in Chicago.
Businesses have already stepped up security. Airports and airlines are going to have to examine what happened to their security systems and do something to improve them.
The virtual shutdown of business in New York City, as well as across the country, disrupted deliveries. With planes grounded, air-cargo companies had to resort to less-efficient means to get the goods to where they were going.
This won't be the focus of financial markets, however, which are predominantly concerned with the possible hit to consumer confidence and spending. If yesterday's attack is a one-shot deal, and there aren't any other forms of psychological terror, such as bomb threats, any effect on confidence should be short-lived, Kasriel expects.
And if the central banks "act in a coordinated manner within the next few days -- providing liquidity, and then formalizing it in terms of a lower interest rate target -- it could have a powerful effect on confidence, says Jim Glassman, senior US economist at J.P. Morgan Chase.
Then there's the argument one hears anytime a natural disaster leaves destruction in its wake: that the rebuilding effort will be great for the economy.
Think of all the non-residential construction that will take place following the collapse of the World Trade Center's twin towers and damage to the surrounding area.
``We'll produce more -- that's for sure -- but we'll be poorer," says Bob Laurent, professor of economics and finance at the Illinois Institute of Technology's Stuart School of Business in Chicago.
It's as if an increase in housing starts without more net new homes. Scarce resources have to be allocated to get us back to where we started. That represents a decrease in living standars -- a negative shock to productivity -- even though the increased activity will add to real GDP growth.
If destruction were really such a good thing, why wait around for acts of God to occur? Why not destroy our own cities and constantly rebuild them? While there will no doubt be a monetary policy response to the ailing economy, if not to this week's events, the fiscal policy response is apt to be greater.
"You remember that locked box?" Kasriel asks. "It's unlocked. Defense spending? No problem. Is the government going to cut back on other spending? No way." In the spirit of bipartisanship in the wake of Tuesday's tragedy, "we'll have more government spending than we would have otherwise," Kasriel says. "And we may even get a capital gains tax cut."
The effect on consumer confidence may be transient. Any change in fiscal policy will be with us for a while.
"The recovery may be delayed, but when it comes it will be stronger than it would have been," Kasriel says.
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