Sponsored By
An organization or individual has paid for the creation of this work but did not approve or review it.

ADVERTISEMENT

ADVERTISEMENT

ANALYSIS: Iraq dominates politics, but not markets

As Washington squares off over Iraq, with President Bush warning of disaster if the United States withdraws and Democrats saying that another 20,000 troops will not reverse what has gone wrong, two questions come to mind:...

As Washington squares off over Iraq, with President Bush warning of disaster if the United States withdraws and Democrats saying that another 20,000 troops will not reverse what has gone wrong, two questions come to mind:

What if they are both right?

And why do investors appear to think both are wrong?

If both Bush and his Democratic critics are right, the issue now, as in the later stages of the Vietnam War, is not whether the United States will lose, but when, and at what ultimate cost.

That cost in lives and dollars will be measurable, but the longer-term damage to the world economy and to the stability and growth of the Middle East is far more difficult to assess.

ADVERTISEMENT

The second question, however, is the more interesting one, in large part because arguments about the economy and Iraq might as well be taking place in separate universes.

As the new year begins on Wall Street, there has been a lot of market talk about the outlook for corporate profits - good, if not as good as in recent years - and about surprisingly strong world economies.

The Bank of England surprised investors on Thursday by raising interest rates there, and Jean-Claude Trichet, the president of the European Central Bank, dropped another hint that he was not through with that bank's series of tightenings. A couple of months ago, futures market traders were confident the Federal Reserve was through raising rates; now they seem less certain.

The risk that is endlessly debated concerns the American housing market and the impact it will have on spending. Will mortgage defaults skyrocket, or has the market hit a very soft bottom? At the moment, the consensus seems to lean to the optimistic side, but no one appears to think the ultimate answer has much to do with success or failure in Iraq.

Financial markets around the world have done quite nicely during this war, and so far in 2007 the most notable market move has been a fall in the price of oil, which is not exactly an indication of worry about Middle Eastern turmoil. Even Bush's saber-rattling toward Iran did not seem to concern oil traders.

It was not always such. As the Vietnam War was grinding to its long end, financial markets around the world plunged. Commodity prices soared, and Western economies went into recession. Defeat in a war seemed to signal the end of the American century, and to be somehow tied to a decline in American economic success.

But that analysis proved to be wrong. Notwithstanding all the talk of a domino effect, a communist victory in Vietnam did not lead to the spread of communism in Southeast Asia, nor did it prevent the collapse of the Soviet empire. And while the heirs of Ho Chi Minh still rule the land, they are as eager as any other government to produce cheap products for sale in Europe and the United States. Economic realities turned out to be more important than political ones.

One reason Vietnam turned out to be so unimportant was that the calculations on why it was important were wrong. Vietnam exports nothing that the rest of the world desperately needs, let alone anything for which alternative sources are unavailable.

ADVERTISEMENT

It would be comforting to think Iraq was similarly overestimated in importance. But it does have oil, and chaos that continues to reduce Iraqi oil exports, let alone leads to the wider Middle Eastern instability that Bush warned of Wednesday night, could devastate Western economies that have not developed alternative sources of energy.

In the aftermath of the Soviet collapse, the elder George Bush talked about a "new world order" in which there was but one superpower. International companies seemed to be able to go where they wished, with almost every country clamoring for investment.

A decade and a half later, that is changing, and the war in Iraq is a major reason. A newly confident and powerful Russia is showing Europe the power of being able to close natural gas pipelines, and it has gotten the international oil companies to express gratitude even as it dictates harsher terms for deals signed years ago.

At bottom, investors now act as if they believe that Iraq will be like Vietnam in a very important way: In the long run, it will have little real significance for the world economy. Let's hope that assessment is correct.

What To Read Next
Crisis pregnancy centers received almost $3 million in taxpayer funds in 2022. Soon, sharing only medically accurate information could be a prerequisite for funding.
The Grand Forks Blue Zones Project, which hopes to make Grand Forks not just a healthier city but a closer community, is hosting an event on Saturday, Jan. 21, at the Empire Arts Center from 3-5 p.m.
A bill being considered by the North Dakota Legislature would require infertility treatment for public employees — a step that could lead to requiring private insurance for the costly treatments.
2022 saw more than three times as many pediatric (up to age 5) cannabis edible exposures in Minnesota compared to 2021. Here's what you can do to prevent your toddler from getting into the gummies.