Finaxyz

Commentary on The Iraq Problem

[6/26/03] Radio Free Europe/Radio Liberty (RFE/RL) posts its fairly extensive Post-Saddam Iraq report every day. Click here to read it.

[5/19/03] Although there is still a lot of chaos in Iraq and progress towards stabilization has been slower than hoped, real progress is being made. Although the media seems to have lost a lot of their interest, you can follow the day-to-day news at the U.S. Army CENTCOM web site: www.centcom.mil. It’s refreshing and even amusing to see the U.S. Army doing a better job at news dissemination than the media itself. It’s also refreshing to see the U.S. Army being so forthcoming and factual, with minimal ‘propaganda’.

[6/28/03] The official Pentagon web site, www.DefenseLink.mil, also contains information about operations in Iraq (as well as everywhere else), but of course it does have the, uh, political perspective of the administration. Still, the stories, news releases, and pictures are at least somewhat informative, including transcripts of press briefings and interviews.

[7/19/03] Click here for the infamous Google Weapons of Mass Destruction ‘error’ page. It is rather tasteless, but worth reading anyway.

[4/17/03] Iraq is now safely on a path towards greater stability and less risk to the world. There will certainly be occasional if not frequent bumps and potholes on the road to stability, but net progress will be made with each passing week. We are now in the mopping-up phase and stabilization and restoration of services phase. The new governance phase has started. The reconstruction phase is coming. Oil production may not be significantly restored until June, but it’s coming.

[4/17/03] The war will be a net positive for the U.S. economy and the global economy. The reconstruction will be a tremendous boon for both the global economy and the U.S. economy in particular.

[4/17/03] The risk of Iraq-inspired terrorist acts in the domestic U.S. is now virtually nil, although there will be ongoing risks to U.S. forces and administrators within Iraq and other countries in the Persian Gulf region for some time to come.

[4/17/03] The bottom line is that investor concerns over the pace of the economic recovery and the state of corporate revenue and earnings growth still drive the market more than all the other non-economic factors. Traders merely use Iraq, et al as excuses for any market fluctuations. There is now little need for true investors to fret at all about Iraq.

[UPDATED 8/3/02] People are wondering how to respond to Iraq’s offer to discuss weapons inspections. Nobody take the offer seriously, but there does seem to be a consensus that at least we have to give inspections one last shot before pursuing “regime change”. I read the Iraqi letter and although it superficially seems sincere, the overall tone seems to be one of evasion.

[UPDATED 8/5/02] Iraq is a many-faceted problem. Just about everybody can pontificate extensively on the myriad of issues that “regime change” poses. I don’t want to minimize the risks, but after carefully thinking through everything that I’ve been exposed to about Iraq since the Gulf War, my assessment is that the problem can be solved militarily with minimal risk, provided that the ‘plan’ is comprehensive and competently executed. Sure, many things can go wrong. But the risks of doing nothing are even greater than even a sloppily executed mediocre plan. Even if the administration does not actually carry out a war with Iraq, the threat of war may be needed to induce Iraq to abandon its pursuit of weapons of mass destruction, support for terrorism, and its enmity towards Israel. Understand that the ultimate goal is not simply to get Iraq to give up its belligerence, but to see that a modern democracy is established to help counter the more extremist and backward elements in the region.

[UPDATED 8/5/02] It is an open question whether the stock market has fully ‘discounted’ the potential for war with Iraq and its economic consequences. Certainly it is has not been a secret that war was a strong possibility. The stock market is funny in the way that sometimes it does a great job of efficiently taking into account even information that isn’t generally known yet and other times it fails to adequately take into account even news that everybody knows. I would think that the market declines over the past few months have more than adequately discounted the prospects and consequences of war with Iraq, but maybe it hasn’t fully done so. Sometimes the market can leave really important issues on a back burner for a long time before suddenly pushing them to a front burner. War with Iraq may not occur for another six months or more and the economic consequences could be spread out over a number of years, so maybe it is too soon for the market to worry about it. We’ll just have to see.

[UPDATED 8/5/02] Some people postulate that war with Iraq will immediately send the U.S. back into recession as it did during in the Gulf War in 1990. That’s not a given. It won’t happen if the war goes well, but it could happen if things fall apart. There are theoretical scenarios under which things get really bad, but they’re not likely.

[UPDATED 8/5/02] There are three main components to the cost of a war with Iraq. First, there is the cost of actually fighting the war. The Gulf War cost something on the order of $75 billion, but the U.S. paid only a fraction of that. This time, the U.S. will likely shoulder all or at least the lion share of the cost. My assessment is that the war could easily cost much less since we have many advances in technology and need significantly fewer tanks and truck and bodies and even planes for even greater effect, and an intense, but short campaign could give us control of Iraq within just a few days. Of course, many things could go wrong and it could take a few weeks or even a few months. But there is no practical reason to assume worst-case scenarios. In any case, let’s all just assume that the actual war costs $40 billion. The second cost is that we will have to buy support or at least acquiescence of some of Iraq’s neighbors, including Turkey and Jordan. That could cost $20 billion, but over say five years, so maybe it’s $4 billion a year, but some of that is simply forgiving payment for previous aid. The third cost is for the ongoing presence of a moderate level of U.S. forces to enable and foster the formation of a new democracy and well as some money for reconstruction until Iraq’s oil industry is ramped back up. That could cost say $5 billion a year over ten years or $50 billion. So, that totals $110 billion, but over ten years. The cost over the next year could be on the order of 40 + 4 + 5 or roughly $50 billion. Sure, that’s a lot of money for the government to spend and will add onto the deficit, but it shouldn’t break the bank or the economy. Also, there is more than enough cash floating around in the U.S. since most companies are trying to avoid adding to their already-heavy debt burden, so the additional treasury borrowing will simply be no problem at all.

[UPDATED 8/5/02] Besides the direct costs of the war, the biggest economic concern is oil. Both its price and its supply. We should just assume that the flow of Iraqi oil stops as soon as the first bullet is fired. In fact, the flow could stop at any time as Iraq searches for ways to discourage us from attacking. For example, Iraq could stop the flow and refuse to export one more drop of oil until the U.S. agrees to abandon its war plans. Of course, Iraq has already stopped the flow once recently in the Spring to show their ‘support’ for the Palestinian cause and we saw how little dent it made. It is fairly safe to assume that Bush has cut a deal with the Russians to assure that they would ramp up oil production should disruptions occur in the Middle East, but that might argue for the war to be deferred until the Spring since Russia has difficulty with production in the Winter. We also have the Strategic Petroleum Reserve (SPR) that will help us through any short-term transition period. There is some potential that Iran might disrupt production to protest the very thought of the U.S. occupying territory right in their backyard. But everybody needs the money from their oil production, so an embargo is unlikely. Although the relationship between the U.S. and Saudi Arabia is tenuous, they’re unlikely to interfere.

[UPDATED 8/5/02] Obviously, bin Laden (if he’s still alive) and crew will find the prospect of more U.S. forces in the region to be a provocation. They could well attempt more terrorist attacks as a result of the U.S. attacking or even preparing to attack Iraq. But they could initiate additional terrorist attacks at any time anyway, so it would be best to just get Iraq on a path to sanity ASAP and be done with it. Note that it is believed that a number of al Qaeda members are believed to be in Iraq at the present time.

[UPDATED 7/24/02] The Bush Administration has signaled its intention to pursue "regime change" in Iraq. They have indicated that "any and all means are on the table" and that includes various military options. Longer term, any improvement in Iraq will be a positive for the stock market, but any short-term military activity could cause the markets to react somewhat negatively. Ultimately the markets will respond positively to even extreme military action, but we do need to be prepared for a bumpy road until The Iraq Problem is somehow resolved. Sometimes the markets react the problems around the bend and sometimes they don't. It is difficult to say whether any market declines in recent months have been at least partially due to anxiety over Iraq (especially on the part of European investors who worry about 'unilateralist' military action by the U.S.)

[UPDATED 7/27/02] Israel has an anti-missile system called Arrow which was jointly developed with the U.S. There is some talk that Israel is trying to stockpile these missiles in advance of an U.S. attack on Iraq which might cause Iraq to start lobbing Scud missiles at Israel. The availability of sufficient missile defenses could be a constraint of the timing of any significant military action against Iraq. The U.S. Patriot anti-missile system that was used with only moderate success during the Gulf War has been superceded by the PAC-3 update to the Patriot, but it’s still under testing and final development and may or may not be ready for deployment. The more advanced THAAD system is also still under testing and final development. The availability of any or all of these systems could be an ongoing constraint on the timing of action against Iraq.

[UPDATED 7/4/02] I rate the odds of an all-out war with Iraq in 2003 at no more than 20%, in other words rather low, and no chance of a war in 2002. The administration certainly seems intent on giving Saddam Hussein the boot, but he’s a wily guy and will do whatever it takes to stay in power, even if it means giving up his weapons of mass destruction and recognizing Israel. Somehow, the stock market will continuously factor in the possibility of a war with Iraq. The market could initially respond very negatively to the onset of hostilities, but will quickly recover as it becomes clear the U.S. is finally fixing a lingering thorn in the side of peace in the Middle East. Buy any such dip.

[UPDATED 7/4/02] There is some probability that the U.S. could initiate some sort of limited, surgical strikes against specific targets in Iraq at any time. In fact, that already happens on an almost regular basis as Iraq frequently fires missiles at U.S. and British jets that are enforcing the ‘no-fly’ zones over Iraq. We shoot back, intending to destroy the facility that attacked us. Sometimes those strikes are very limited and sometimes not so limited. But the strikes I am talking about here would be those intended to take out a facility that is deemed a threat to U.S. national security. Such strikes would not be an act of war, and would fall under the rubric of enforcing existing U.N. resolutions calling for Iraq to give up its weapons of mass destruction. The market could react very negatively on such news, but those dips should definitely be bought.

[UPDATED 7/13/02] There is talk that the U.S. will not attack Iraq unless there is a direct provocation by Iraq against U.S. interests. This may merely be an intentional leak to float a trial balloon to see how Iraq and our allies react.

[UPDATED 7/15/02] Uncertainty over the leadership crisis in Turkey effectively puts any all-out U.S. attack on hold since the political support of Turkey is critical as the U.S. needs to use airbases in Turkey.

[UPDATED 7/4/02] Iraq does have stocks of chemical weapons and possibly biological weapons. It most likely does not have any nuclear weapons, but has been trying very diligently to develop them. They do still possess Scud missiles capable of hitting Israel and U.S. bases in the region. The fear is that if Hussein ever does feel that his days are numbered then he will have nothing to lose by using all those weapons. Their possible use against Israel also acts as a deterrent to a U.S. invasion.

[UPDATED 7/4/02] It’s also somewhat possible that Iraq will initiate terrorist attacks within the U.S. if attacked. Quite a number of people actually believe that Iraq may in fact be behind the Anthrax attacks. The market could respond very negatively, especially if any attacks cause any significant economic and social disruption. Once again, buy any dips as such attacks would encourage an even more bold and rapid response that would bring down Iraq in much shorter order.

[UPDATED 7/4/02] It is not my intent to raise alarm over Iraq, but the issue is lurking in the background and popping up frequently in discussions as a possible risk. People should be prepared to deal with the possible scenarios. The goal is not so much to profit from Iraq-related disturbances, but to remain calm and not do anything foolish like dump all your stocks (and switch to gold) in a panic. In general, war is bullish for the market, if for no other reason than that it stimulates government spending which in turn stimulates the economy.

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Updated: August 31, 2003 03:38:08 PM -0400