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Mix-Ansicht- Deflation is a bigger threat than Saddam - Morpheus, 15.10.2002, 09:47
- Re: Deflation is a bigger threat than Saddam / Der Autor gefällt mir ;-).... - --- ELLI ---, 15.10.2002, 09:55
Deflation is a bigger threat than Saddam
-->Deflation is a bigger threat than Saddam
Larry Elliott
Monday October 14, 2002
The Guardian
Military action by the United States against Iraq seems inevitable. Having won the support of both houses of Congress last week, George W Bush will now step up his pressure for the backing of the United Nations. All the signs are that jaw-jaw will soon be followed by war-war. The Pentagon remains sceptical that weapons inspections will succeed and is already preparing for a fight. Bombing raids on Iraq have been stepped up and movement of heavy equipment to the Gulf is under way.
The message coming out of Washington is clear. Bush would like to have the support of the UN, but will go it alone if he has to. Even the tragic events in Bali this weekend, which suggest Washington's obsession with Iraq is blinding it to the real threat from terrorists, are unlikely to deflect the hawks.
Economists and financial analysts have begun to take a real interest in the president's intentions, producing weighty pieces of work on when the operation is likely to begin, what form it will take and what the cost will be.
It's not hard to see why the number crunchers have turned themselves into armchair generals.
The drop in consumer confidence in the US to its lowest level for nine years illustrates that all is not well with the global economy; the wholly realistic fear is that a full scale bust-up in the Middle East has abundant potential to make matters worse.
Trouble spot
Each of the three previous global recessions in the west - in the mid-1970s, the early 1980s and the early 1990s - have coincided with trouble in the Middle East. In all three, oil prices rose sharply, adding to inflationary pressure and leading to higher interest rates and slower growth. To put it mildly, any tightening of monetary policy with the world economy in its present state would not be helpful at a time when the mood among both policymakers and market players is already dismal.
Lehman Brothers says that its discussions with central banks, hedge funds and equity fund managers reveal a litany of worries - that the impact of last year's interest rate cuts has faded, that there is a risk of deflation, that the US and Europe are on course to emulate Japan's"lost decade" and that shares on Wall Street could fall by another 40% before bottoming out. Add a war into the mix, and it's not hard to see why the markets have been so febrile.
The feeling now is that if there is going to be a war, it would be better to get it over with as soon as possible. Under this scenario, we get a reprise of the first Gulf war of 1990-1991 - a short, brutal campaign in which America uses its overwhelming air superiority to destroy Iraq's fighting capability, paving the way for mopping-up operations on the ground. As far as the markets are concerned, this is about as good as it gets (although not for the Iraqis, for whom the consequences would be catastrophic).
A lightning war would end the nagging uncertainty, which has been a considerable drag on both confidence and share prices, and would also ensure that any spike in oil prices would be brief. Best of all would be if the toppling of Saddam led to an increase in oil shipments from Iraq, when there would be an even steeper decline in oil prices, reducing business costs and raising the real incomes of consumers.
If the comparisons with 1990-1991 hold true, both the global economy and global markets could be witnessing the darkest hour before the dawn. Then, the most bearish phase for the markets was the period between the Iraqi invasion of Kuwait in early August and the beginning of the military build-up by the coalition in October. At that point, share prices stopped falling and oil prices stopped rising. Once the two-week war started in January, the equity market moved into a bull phase and the oil price dropped back down through $30 a barrel.
There are, naturally, gloomier scenarios. One would be if the phoney war dragged on well into next year, accompanied by inconclusive negotiations and sabre-rattling. That would leave a cloud hanging over the global economy, bearing down on consumer confidence and making companies even less likely than they are at the moment to boost investment. Worst of all would be a protracted war in which the Iraqis, having learned their lessons from the crushing defeat of 1991, fight an urban war that forces the Americans to break down resistance house by house and street by street. More Stalingrad than Vietnam, in other words.
On past form, however, it is possible that the markets are overestimating the military difficulties involved in a war between the world's only superpower and an impoverished nation with equipment even more obsolete than it was 12 years ago. Even if that is so, however, they may still be underestimating the economic risks.
Vulnerable
First, there is the oil price. The expectation is that there would not be a serious disruption to supplies from the Middle East, but the alleged terrorist attack on the French tanker a week ago shows just how vulnerable the west could be. Iraq only accounts for 3% of global production, but its neighbours account for a further 17%. According to the International Energy Agency, demand for oil is weakening in response to the global slowdown, but any hint that the west's supply chain was being disrupted would lead to a hefty rise in the cost of crude.
Second, it is possible that even a temporary rise in oil prices exposes deeper weaknesses in the global economy. Goldman Sachs says that"perhaps the greatest macroeconomic risk of an oil price spike is that it acts as the trigger for a more rapid unwinding of existing imbalances in the US". Americans are al ready spending more than the state of their finances suggests is prudent, so it is possible that the hit to real incomes provided by higher petrol prices would lead to retrenchment in consumer spending, the underpinning for economic growth.
Third, the real threat to the global economy from a war in the Middle East is not inflation but deflation. Nearly every leading developed country has plenty of unused capacity, with firms unable to pass on cost increases in the form of higher prices and workers unable to squeeze more generous pay awards out of their employees. Faced with higher energy prices, companies would have to accept lower profit margins and individuals lower real incomes. Demand would be lower, leading to even greater deflationary pressure.
Fourth, this would require policymakers to take urgent action to support demand. Brian Reading of Lombard Street Research believes that"inflation is not a serious problem, except as perceived by the ECB in euroland. Japan already suffers deflation, the US faces the possibility of falling prices. The UK, self-sufficient in oil, does not suffer demand deflationary pressures to the same extent as other countries. Governments will therefore be more concerned to limit the damage to growth than to check the impact on prices. The issue, obviously exemplified by Japan, is their ability to do so". This, of course, is the crux of the issue. There will be a strong case for both monetary and fiscal easing that would underpin confidence, reduce the cost of borrowing and boost incomes. A cut in American rates by the Federal Reserve next month is becoming more likely by the day, and history suggests that Bush will also increase defence spending, cut taxes and conviently forget about the budget deficit. Rates could be at around 1% in the US by the new year and remain there for the whole of 2003.
Europe's response to a war is likely to be less aggressive, in part because it is more dependent on imported oil than the US and will suffer a bigger inflation shock from any rise in the price of crude. But, the reality is that the world economy stands on the edge of a cliff. It is still struggling with the consequences of the late 1990s boom - too much capacity and too much debt - and will continue to struggle with them even if the war against Iraq is swift.
Deflation is a much bigger threat to the west than Saddam will ever be, yet one half of the world appears to believe in Anglo-Saxon demand management and one half does not. Europe has deep misgivings about US foreign policy, but it should have greater sympathy for US economic policy. It is time for everybody to put their shoulder to the wheel.
Quelle: guardian.co.uk
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