War Must Be Short and Sharp to Bring Benefits

A sharp, quick and decisive US victory in Iraq will help heal the US economy but a lengthy conflict could push it back into recession.

That’s the long and short of it for financial and economic experts polled by DEBKA-Net-Weekly on the cost of doing battle against Saddam Hussein.

“I have no doubt that a short and successful war would strongly boost (economic) confidence while a quagmire would hurt it,” one analyst said.

Leading an alliance of one this time around, the United States will have to weather most of the costs and effects of Desert Storm Two. Experts put the price tag of President George W. Bush’s Gulf War at anywhere from $80 billion to $200 billion. The spread reflects uncertainty as to how long it will take Bush to do the job his father chose not to complete – ridding the world of Saddam and his weapons of mass destruction.

First, the worst-case scenario: Oil will grease the slide into possible world recession should the Iraqi dictator manage to set his neighbors’ oil fields ablaze.

Most economic analysts forecast that Saddam will be unable to cause any serious long-term oil supply disruption outside Iraq. But if he does, the risk of a double-dip back into recession increases and US GDP growth could fall to zero in the first half of next year.

If black clouds billow over the Gulf, oil prices could shoot up above $40 per barrel from the current range around $25 per barrel, raising costs for business, lowering industrial production increasing unemployment and battering stock markets.

On the fiscal front, “continued higher oil prices would lead to higher inflation rates and eventually higher bond yields,” one analyst told DEBKA-Net-Weekly.

As the United States watched its best laid war planes go up in smoke, foreign investors would shun US stocks and bonds, and the dollar – no longer anyone’s safe haven – would weaken, the analyst added.

Experts forecast that European growth also would be battered but Japan would not be hit as hard because it has reduced its consumption of crude oil.

Now the good news: Most analysts are basing their war fiscal and economic forecasts on the probability that the United States will wrap up its military offensive quickly – a short and sweet campaign scenario – while acknowledging that oil is a powerful wild card.

US consumers would celebrate a swift victory with their pocketbooks, share prices would head north and the current sluggish economic rebound would accelerate.

Once Saddam is gone and the United States takes over his oilfields, Iraqi output is likely to increase. Saudi Arabia would become the major player in determining whether oil prices rose or fell. It could cut its own production to support prices in an oil glut, or increase output to maintain its market share. Analysts forecast Saudi Arabia will pour more oil on to the market, causing a temporary price rise to $40 per barrel which will then fall to around $15 to $20 per barrel.

Experts agree that war with Iraq, regardless of its length, will have an adverse effect on the US budget deficit as the United States meets the costs of the conflict on its own.

The Congressional Budget Office has put together estimates suggesting the war would entail a fixed cost of about $15 billion to $20 billion for moving resources back and forth, with an incremental cost of close to $10 billion a month. Occupation of Iraq is estimated to cost about $2 billion.

Some of the cost of the war is already included in defense appropriation bills for the coming fiscal year, with defense spending expected to rise by about 11 percent.

According to some forecasts, the current budget deficit of around $160 billion would widen by about $40 billion, to about 0.4 percent of GDP, in the event of war.

Analysts do not expect the Bush administration to make significant spending cuts elsewhere to defray these costs before the 2004 elections – meaning that the war, provided it does not drag on, could provide a modest stimulus to growth next year.

The uncertainty of the war’s outcome could cause US consumer confidence to weaken by as much as 25 percent in the initial stages of the offensive. But experts believe the impact might be smaller than during the 1991 Gulf conflict because war is expected, oil prices have not spiked to same degree and there is widespread confidence the United States will easily win.

One analyst predicts an initial “sell-off in financial markets leading up to the actual engagement, accompanied by declining confidence and rising oil prices”.

But, the analyst added: “Within weeks, once it’s clear the war is going well, confidence will return, markets will rally and oil prices will fall to the $20 per barrel range.”

If history repeats itself, it could be time to snap up some undervalued stocks.

One expert noted that US stock markets have rallied during wars – such as the coming campaign against Iraq — that could be anticipated. The mean annualized US stock market return during those wars was 17 percent. On average, the market was down two percent in the prior year. On average it rallied six percent in the year after the war ended.

Looking back at the last Gulf War, the market was down 13 percent in the year before the US-led alliance ousted Iraqi occupation forces from Kuwait and 34 percent after the offensive began.

It then rose 11 percent in the year after the war concluded.

The unknown quantities

Economists base their analyses on data, current or historical. But armed conflicts are notorious for defying rational assessments. For instance, the best-known international economists today base their estimates on the information that the Iraqi army has halved in size since the 1991 Gulf War and that the United States has extended the lead it enjoyed eleven years ago in both equipment ad intelligence.

DEBKA-Net-Weekly‘s strategic analysts agree that this data may be correct, but it is also fallacious.

Even when the Iraqi army was at its largest, around one million troops – in the conflict with Iran in the nineteen eighties and in the 1991 Gulf War – only around one-fifth consisted of fighting men. The other four-fifths were untrained or semi-trained militiamen who held the lines and policed the towns to guard against popular unrest. The size of the Iraqi army may indeed have halved, but its fighting strength has been boosted together with much larger appropriations for its operations.

As for the second piece of information, it is true that US equipment has improved vastly since 1991. However, the assumption that US intelligence has kept pace is simplistic. Its technology is certainly improved; not so human intelligence. To this day, for instance, American undercover agencies have not been able to locate Saddam’s secret WMD depots.

As for rating the economic effects of the war, most analysts group the likely scenarios under three main headings: quick and successful; protracted – or quagmire; and disastrous.

DEBKA-Net-Weekly‘s strategic analysts suggest that the real conflict will probably fall somewhere between those three.

An ecological disaster with powerful economic ramifications, of the type Saddam Hussein has loosed already, was predicted by no one. Two months ago, Iraqi military intelligence started a huge, slow-burning, slow-spreading fire that is consuming the rare reeds, wildlife and underground peat of the marshlands straddling some 10,000 km of the Iraq-Iran border region. It threatens unbelievable damage aside from destroying a unique and ancient eco-culture to the dismay of environmentalists.

Iran has complained that the billowing black clouds carried over by the wind are polluting villages and towns. Winds may spread the black smoke further through the Persian Gulf and its shores. By the end of November, most of the affected region will be enveloped in a dense cloud of smoke. Apart from the severe ecological damage, this blight can seriously disrupt American military and aerial activity as well as causing economic damage to the emirates and casting a psychological pall over its peoples.

Our military sources suggest Saddam got the idea of setting the marshes on fire from the consequences of his action in igniting Kuwait’s oil wells in 1991. The high flames and belching smoke over Kuwait were accompanied by freak storms that engulfed the entire Middle East bringing heavy snowfalls to places that had never had snow before.

American invasion plans for Iraq would certainly be affected. The burning marshes will act as a barrier to deter a possible Iranian military incursion to link up with the native Shiites and the American invasion force. The US special forces already in the region may also be driven out by the smoke.

Some economic analysts are seriously weighing the consequences of an internal terrorist attack inside America. Judging from 9/11, they are predicting its impact could be more calamitous even than a protracted war in Iraq.

This type of threat is detailed in the next article.