09-Apr-03
Economic Consequences of the War in Iraq
Marc Faber
History: "A collection of the crimes, follies, and
misfortunes of mankind." Voltaire
Before the allied forces began their attack on Iraq, stocks around the world
began to rally sharply, as a quick resolution of the conflict was expected.
American and British military and political strategists were of the opinion that
the local population would rise against Saddam Hussein's unpopular and
despotic regime and that, therefore, the invading allied forces would be
greeted with as much relieve and joy as the French population welcomed
American troupes during the Second World War when they liberated France
from the German occupation. However, as one might expect, lacking any
knowledge of history, these American strategists overlooked that, no matter
how vicious a leader is, the invasion of a sovereign territory by a foreign force
will always rally people around their leader and stiffen the resistance. In fact,
since the protagonists for the war against Saddam Hussein have repeatedly
compared his viciousness to Stalin, they should have known how badly Hitler
miscalculated when he attacked Russia in the belief that the Russian
population would receive his troupes with open arms and support his
"liberation" of Russia from the yoke of Stalin - one of history's most ruthless
leaders. But, to the contrary, Hitler's attack led to one of the fiercest
resistances in military history and the defeat of the invading German
Wehrmacht, which really turned around the Second World War in favor of the
allied forces. To be sure, I do not expect a repetition of the German defeat at
Stalingrad in 1943 to occur in Baghdad, since today's coalition forces have
such an overwhelming military superiority. There should be no doubt that
sooner or later Saddam Hussein's regime will be annihilated, but the problem
may be less the removal of Saddam Hussein than the maintenance of peace
and order following his forced downfall. Having spent some time in the Middle
East, I am convinced that the Arabs will never again tolerate an occupation
by any foreign power and that, therefore, the victory of the coalition forces at
the battle of Baghdad will be followed by a nasty, messy and factional
guerilla war, which will drag on for a very long time and in time mortally bleed
the coalition and peacekeeping forces. I remember well how I met a French
member of the Foreign Legion in the 1960s on the Island of Corsica who, in
1954, had fought at Dien Bien Phu in Vietnam, and served during the
Algerian uprising prior to Algeria gaining independence in 1962. According to
him, his regiment was relieved when they left Vietnam and every legionnaire
was looking forward to be stationed in Algeria, which they thought would be
like a paradise when compared to the tough campaign and eventual hellish
defeat they had experienced in Vietnam. But, this proofed to be an illusion.
According to him, the Algerian war turned out to be far worse than Vietnam,
because the French troupes in Algeria never knew who was friend or enemy
and, therefore, incurred tremendous casualties in continuously recurring
ambushes, acts of sabotage, and raids on their camps.
In Iraq, there will be another complication since the country is composed of
so many different ethnic groups who will all wish to gain some economic and
political advantages from Saddam Hussein's demise. Moreover, it is likely
that the Syrians, the Turks and the Iranians will in time also meddle in the
affairs of their Iraqi neighbor, which is likely to bring turmoil to the region for a
long time to come. In short, while the coalition forces are sure to eventually
win the battle at Baghdad, and to get rid of Saddam Hussein and his clan,
this may not bring the expected stability and peace to Iraq and the Middle
East, but lead to a series of unintended consequences, such as the
possibility of an independent Kurdistan in the north of the country and guerilla
warfare against the foreign occupation forces.
In fact, I should like to remind our readers that a number of economists and
historians have observed the existence of War Cycles in history. The
historian, Arnold Toynbee believed in a war-and-peace cycle as a
consequence of a "Generation Cycle in the transmission of a social
heritage". He noted that, "The survivors of a generation that has been of
military age during a bout of war will be shy, for the rest of their lives, of
bringing a repetition of this tragic experience either upon themselves or upon
their children, and… therefore the psychological resistance of any move
towards the breaking of a peace ….is likely to be prohibitively strong until a
new generation…. has had the time to grow up and to come into power. On
the same showing, a bout of war, once precipitated, is likely to persist until
the peace-bred generation that has been lightheartedly run into war has been
replaced, in its turn, by a warworn generation".
According to some other observers of cycles, wartimes tend to occur when a
certain "climate" or belligerent mood among people exists. The famous
economist Kondratieff established empirically that the periods of the rising
wave (which are characterized by a rise in commodity prices and interest
rates) "are considerably richer in social upheavals and radical changes in the
life of society (revolutions, wars) than are periods of downward waves".
According to him, "the upward movement in business conditions, and the
growth of productive forces, cause a sharpening of the struggle for new
markets - in particular, raw materials markets. On the one hand this makes
for an expansion of the orbit of the world market and the involvement of new
countries and regions in the trade network. On the other hand, it makes for
an aggravation of international political relations, an increase in the
occasions for military conflicts, and military conflicts themselves. At the
same time, the rapid growth of new productive forces, intensifying the activity
of the classes and groups within that have an interest in that growth, creates
the prerequisite for sharpening the struggle against socioeconomic relations
that are obsolescent and hinder development. It creates the prerequisite for
big internal upheavals".
I may point out that major conflicts such as the Napoleonic Wars, the
Crimean War (1853-1856), the American Civil War, the Franco Prussian War
(1870-71), the Sino-Japanese War (1895), the Spanish American War, the
Russo-Japanese War (1905), the First World War, the February Revolution in
Russia (1917), the Second World War and the Vietnam War all occurred in
periods of the rising Kondratieff wave. And although the Kondratieff cycle is
now only bottoming out, the increase in commodity prices we have seen over
the last 18 months does suggest that the long wave has probably already
started to turn up - at least as far as commodity prices are concerned. So, if
I combine the Toynbee's peace-bred generation - in our case the baby
boomers - which are more likely to run "lightheartedly" into war than their
parents, since most of them hardly remember the Vietnam war, not to
mention the horrors of the Second World War, and the rising wave of the
Kondratieff cycle, we should be prepared for a more hostile and bellicose
world in the years to come - regardless of how quickly the present military
conflict in Iraq will be settled. Moreover, while a rising Kondratieff wave has in
the past led to a more belligerent mood, wars in turn also had the effect to
create "upside distortions" in commodity and wholesale prices, because
wars tend to temporary push up demand for raw materials. In sum, I think
that investors should be aware that the late 1980s and 1990s were extremely
unusual from a historical point of view since, aside from some minor
conflicts, there were no major wars or revolutions. Moreover, the peace
dividend following the end of the cold war certainly was a contributing factor
to higher stock valuations around the world (declining interest rates and rising
profits aside). If the world is now moving into an era of increased geopolitical
tensions, then this will be an additional negative factor for equity valuations.
Moreover, it is very doubtful that the US has the financial means to pursue
imperialistic policies around the world. The US increasingly depends on
foreign capital flows to finance its excessive consumption and also has by
now a negative net investment position. Until 1987, US investments in foreign
countries exceeded foreign holdings in the US. However, over the last 15
years or so, the US net asset balance has deteriorated very badly with the
result that foreigners now hold more than 7.3 trillion of US assets compared
to US holding of foreign assets of around 5.3 trillion - which means a current
negative net balance of more than $ 2 trillion, or 20% of GDP. Now let us
assume that the current account deficit does no longer grow but stabilizes at
an annual rate of around $ 500 billion (the US current account deficit rose in
the fourth quarter of 2002, 44% y-o-y to $ 136.9 billion or annualized $ 547
billion). In this case the US net asset balance will continue to deteriorate and
reach around 50% of GDP in about 5 to 6 years time and 100% of GDP in
approximately ten years time! Now, I am not suggesting that it would be
impossible for foreigners to boost their net assets in the US to 100% of GDP,
but obviously the larger the percentage of US assets, which are held by
foreigners, the more the US becomes vulnerable to the whims of foreign
investors, and this not just in terms of the value of the dollar but also in terms
of all asset markets, since foreigners hold approximately 30% of US
treasuries, 13% of US equities and 23% of corporate bonds. I must say that I
admire the US government's ambition to be or to become an empire with
such a poor net investment position to start with! If the historian Barbara
Tuchman was alive she might include such imperial and military ambitions,
at a time of the already existing huge US external imbalances, in her
collection of "follies of history".
Given above thoughts, I doubt that the end of the battle of Baghdad will lead
to a sustainable equity bull market in the US. More likely, the aftermath of
the war will be painful and full of tensions in and outside of Iraq. This will, in
my opinion, continue to weight on US equity and bond prices, and the dollar
in the long term. Still, the stock market rally, which began in mid March,
may have some more life in April, as April tends to be a seasonally strong
month for equities. |
