It’s time for the old Jeremiah/Cassandra double act again. The Speculator, the Doomsayer, speaks in numbers. As I write, the president of the US is threatening to attack Iraq. Those in the know look for signs of contingency planning. How do you win over allies? How do you actually fight a war? And what do you do if you win? So far they look in vain. If I were in the military I would be worried. Being given a white feather and a picture of Saddam Hussein with his last known address is no substitute for strategy.
Of course, those of us who have no intention of saluting Caesar and facing death have more traditional questions. Namely, what’s it going to do to the bottom line? Will this bring back our pensions? A Texan replies, ‘You betcha!’ The most frightening thing is that the government is not addressing the economic consequences at all.
Dr Samuel Johnson claimed there was nothing to concentrate the mind so well as an impending hanging. True enough, world wars tend to be good for the American economy. The US sells other people the wherewithal to buy the weapons and commodities they need to fight the war, and when they run out of the readies, America lends the cash to carry on. However, economically speaking, this one is unlikely to turn into a world war just yet.
The last Gulf war was good, in a Keynesian way, for the US and the British economy. All that expensive fancy ordinance had to be replaced, and the Saudis and Kuwaitis paid for it in cash. It seems likely that the US Treasury and its UK counterpart made a sizable profit from Desert Storm, and one suspects that the aerospace industries may not have made a loss either. Those of us with a long memory and a sense of déjà vu will remember that the big debate then was deficits versus ‘No New Taxes’.
However, faced with a total lack of enthusiasm for this war from yesteryear’s bankrollers of Desert Storm, it will have to be paid for by US taxpayers and US bondholders, most of whom are foreigners.
Let us consider the circumstances. With a double dip recession looming, the Federal Reserve is under strong pressure to lower interest rates, which are getting perilously close to negative anyway. The dollar is getting shaky, not least because of the $150 bn budget deficit. Since the war is likely to increase the deficit, any significant cost will damage financial confidence both internally and externally, thus adding pressure to increase interest rates and aborting any chances of uplift in the economy.
The US dollar is also suffering because the euro is now a tangible reserve currency in a way that it wasn’t last year when the September 11 atrocities gave the dollar jitters. The imploding US stock markets have also lessened the inflow of foreign funds.
Of course it does not help that xenophobia is not an exact science and so trial lawyers are on the trail of Saudi institutions. That has already led to a steady outflow of oil money from the US, and the prospects of a war will only exacerbate that. China, Hong Kong and Japan could change their mind about using the dollar as their reserve currency. They have already suggested they may switch some of their reserves to euros.
In Russia, which is already unhappy with the impending war, there are some $100 bn in dollar notes circulating. A shooting war may have a lot of those being changed for euros which, conveniently for the tax-shy Russian middle kleptocrats, come in much higher denominations.
Indeed, Iraq has already insisted on euros for its oil sales and other oil states are considering doing the same. With Iraq and possibly the rest of the Middle East out of the oil markets for some time, the oil price for the future is up and up.
The effect on the American economy – think of the barely flapping airlines – would be catastrophic. The US balance of payments, already in dire straits, would be severe, and any whiff of measures to freeze assets would only hasten the rush from the dollar as reserve currency.
In major wars, citizens are prepared to tighten their belts and work harder. But it seems most Americans are unsure what this all has to do with them. Saddam Hussein is an evil person, but there is no convincing evidence that he was behind the suicide teams that blew up the World Trade Center. If Saddam disappears in a puff of smoke people will cheer. If it’s their pensions, jobs and taxes going up in lines of laser-guided smoke, they will jeer.
Of course, it may not come to this. A wise and prescient administration committed to planning like FDR’s wartime administration may already have defensive measures in place. Personally, I’m going with the euros.
The Speculator
