Discounting War and Terror
Risk
Warren Pollock
The Macroeconomic Newsletter
eMail pollock.warren@verizon.net
Aug 4, 2004
Captive over-reliance on the United States means that international
markets are hesitant to accurately discount the future costs
of war, natural resource shortfall, lost manufacturing base,
and terror.. The value of dollar denominated assets are much
too high to be realistic to risk and reality. Adjustments
have not occurred because a large dependency on US GDP means
that US markets and assets have artificial staying power.
 We know that
on worldwide basis common political interests have broken down.
Economic ties, interdependence, and interrelationships are a
bit more sticky. However, the global economy has no choice but
to follow the political tone that has been set to conclusion..
To date, the magnitude of global dependency means that orderly
exit out of US dominated institutions and US denominated assets
may be impossible. For now, the ranchers governing the global
economy know they cannot afford to have the cattle stampede out
of the dollar and the DOW. News must not be allowed to tarnish
the safety of a peace time facade. Eventually private large money
will exit, it may have done so already.
In a fit of fantasy, preserving the status quo means, that everything
has to stay the same even though people notice that individual
purchasing power for food and energy has visibly eroded through
the effects of wartime. Economic and security risks are issues
and costs without mention.
As part of a society in denial, the Federal Reserve, and CIA
(footnotes), have intentionally misanalysed
the war by limiting the definition and scope of this conflict.
The events unfolding are global, they are not localized in Iraq,
nor can they be contained. Denial means that the US has limited
social, financial, and political commitments to war. This does
not mean that global war has not been occurring. Many wars begin
unilaterally, with a single aggressor aligned against an unprepared
or unwilling enemy. Because of denial, ultimately more civilians
will be adversely effected than direct combatants. Again, beyond
9-11 and Iraq, the first domestic casualty of war has been the
recent declination of the US standard of living.
War tends to arbitrate issues between groups of people contending
for resources, accessing freedom, and seeking greater allocations
of scarce global purchasing power. Ironically standards of living
may go down whether or not the war is ever funded.
At least the Federal Reserve realizes in terms of Iraq that "increases
in war risk caused a rise in oil prices, a fall in Treasury yields
and equity prices, a widening of corporate yield spreads, and
a decline in the dollar." By contrast war risk did not have
"a significant impact on the price of gold or on the liquidity
premium on the ten-year Treasury note." The cattle ranchers
have a strong hold on the livestock.
What happens when the scope of this war has been adequately defined?
What will the USD be worth? How will gold be priced? What interest
rate could provide adequate reward to risk? How will the US cope
with its energy needs? Will global transportation and free trade
prevail? What are the fundamentals of US purchasing power and
living standards? These are some of the questions the arbiter
of war will attempt to answer. The primary objective in the developed
world may be continued economic prosperity and stability through
the status quo. Politically the stasis of steady state has been
abused and broken.
The objective of the lesser franchised may be regional unification,
political religion, self determination, and domestic betterment.
China Russia and India are better positioned than emerging Pan-Islam,
or "Old-Europe."
In a zero sum game, the people who have most to lose will lose
the most. This may be especially true because the war and its
implications have been poorly defined to kowtow to the economic
expectations of the developed world.
Notes:
Many of the traders I speak to point to rallies which occur in
the DOW between 1 and 2pm. Do you see these rallies?
Are you aware that Japan can earn 2% in arbitrage with a steady
or falling exchange rate?
CIA Fact book regarding Dow 10000
...A major short-term problem in first half 2002 was a sharp
decline in the stock market, fueled in part by the exposure of
dubious accounting practices in some major corporations. The
war in March/April 2003 between a US-led coalition and Iraq shifted
resources to the military. In 2003, growth in output and productivity
and the recovery of the stock market to above 10,000 for the
Dow Jones Industrial Average were promising signs. Unemployment
stayed at the 6% level, however, and began to decline only at
the end of the year. Long-term problems include inadequate investment
in economic infrastructure, rapidly rising medical and pension
costs of an aging population, sizable trade and budget deficits,
and stagnation of family income in the lower economic groups.
http://www.federalreserve.gov/pubs/feds/2003/200318/200318pap.pdf
The Effects of War Risk on U.S. Financial Markets
Roberto Rigobon MIT Sloan School of Management and NBER
and Brian Sack
Board of Governors of the Federal Reserve System
April 23, 2003
Aug 2, 2004
Warren Pollock
The Macroeconomic Newsletter
eMail pollock.warren@verizon.net
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