[A-List] US imperialism: a "market" view

["Michael Keaney" <michael.keaney@xxxxxx>]

[A useful piece of information reported in such a matter-of-fact way: "The
Central Intelligence Agency ... depends heavily on former Mormon
missionaries because they are the only Americans prepared to learn exotic
foreign languages".]


Victory will bring no clarity for the markets
By David Hale
Financial Times, March 21 2003

World stock markets have rallied on the perception that the US will soon
destroy the Iraqi military as effectively as it did during the Gulf war of
1991. Even the Baghdad stock market has risen more than 30 per cent this
year in the hope that the US will produce a more prosperous Iraq than
existed under Saddam Hussein.

Markets are enthusiastic for war because they perceive that uncertainty has
had an adverse impact on the US economy during  recent months. In February,
the US lost 308,000 jobs while Canada gained 55,000 jobs. The weakness of US
employment reflects both geopolitical fears and the delayed impact of last
summer's Sarbanes Oxley legislation on corporate perceptions of risk. Canada
has had neither corporate scandals nor the risk of war, so its business
sector is far more confident than the US's.

While it is natural for the markets to be impatient for action, a military
victory will not be able to resolve all the uncertainties resulting from the
conflict. First, there is a not insignificant risk of new terrorist attacks
on the US, or on its citizens overseas. Such attacks could delay any
resurgence in consumer confidence.

Second, it is still not clear what impact the US's clash with Germany,
France and other countries over war with Iraq will have on the western
alliance. Will the clash lessen co-operation or trade and other security
issues? Will France and Germany now exclude Britain from important decisions
on Europe's future? Will the United Nations be less effective at resolving
new crises, such as the one now pending over North Korea?

Third, what will be the cost to the US budget deficit and current account
deficit of the country's new international role as a superpower acting
unilaterally? The financial markets are concerned about US assertiveness
because they perceive it could be opening the door to a new age of
imperialism, with significant economic consequences.

After a great peace dividend following the cold war, US defence spending is
now increasing dramatically. During the cold war, America's allies often
helped to shoulder the burden of US military spending. Germany had a formal
offset programme in which it stockpiled dollars at the Bundesbank in order
to offset US defence expenditure. During the Gulf war of 1991, the US
received huge subsidies from Japan, Germany, the Gulf states and Saudi
Arabia to pay for the cost of evicting Mr Hussein from Kuwait.

The US will receive no subsidies to pay for the current war. If the
occupation meets great resistance and proves to be expensive, the US will
have to assume all of the costs. The markets would regard such a development
as negative because of the potential consequences for the fiscal deficit. In
fact, Congress would probably respond to a high-cost war by vetoing George
W. Bush's tax cut proposals, which were designed to bolster the equity
market. Many Europeans think the US hopes to make money from the war by
exploiting Iraq's oil reserves; but Iraqi oil production is worth only about
$25bn (?23bn) a year -- or just 25 per cent of the cost of the projected
war.

Despite enthusiasm among neo-conservatives for war in Washington, it is also
unclear if either the US government or its people are truly prepared for a
new imperial mission. Until 2003, the government's international affairs
budget had been in decline for many years. The Central Intelligence Agency
has not been able to recruit the best and brightest from the country's elite
Ivy League universities for nearly two generations and depends heavily on
former Mormon missionaries because they are the only Americans prepared to
learn exotic foreign languages.

The US's own tradition of anti-imperialism also helped to create the
precondition for conflict with Iraq. Franklin D. Roosevelt set the stage for
current crises in Israel, Kashmir, Africa and the Gulf by promoting the
rapid liquidation of the British empire after the second world war. The US
is forced to fill a balance of power vacuum created by the British
withdrawal.

The sustainability of the market rally will hinge upon how the US reconciles
its new imperial ambitions with the realities of large fiscal deficits and
unprecedented current account deficits. The cost of the war has clearly put
the president's fiscal strategy at risk. What remains to be seen is what
additional sacrifices the US will have to make in order to support its new
imperial responsibilities.

The writer is chief economist for Helix Capital, an investment management
firm.