Alan Reynolds

A stock market commentator recent noted "the commonly held view that stocks will rally and oil prices will plunge as soon as bombs start dropping." Another alluded to the view "that stocks soar once the uncertainty over Iraq is resolved -- either through military action or through a peaceful settlement." An economist on CNBC promised the economy would rebound "once we get the Iraqi situation resolved."

These comments assume the start of war would "resolve uncertainty." That is because uncertainty was oddly defined as wondering whether or not the United States will attack Iraq. That is surely one of the least uncertain prospects in a world of ubiquitous uncertainty. It is no coincidence that stocks collapsed worldwide as uncertainty about "a peaceful settlement" virtually vanished. Investors rushed into "safe" gold and Treasury bonds, driving bond yields to a 44-yield low (bonds are safe only if you like to buy high and sell low). Markets clearly anticipate serious economic damage from war.

Once we define actual war worries more sensibly than the mere probability of war, it is obvious that the beginning of war cannot possibly be the time when "uncertainty over Iraq is resolved." That is when the most ominous uncertainties begin. War may increase risks of terrorist counter-attacks in the United States and Britain, for example. But stocks have fallen just as sharply over the past month in Japan, Germany and France. That suggests it is higher oil prices, rather than terrorist reprisals that have mostly accounted for anxieties depressing world stocks. That is potentially good news because high oil prices are something we can easily do something about, as I explain later.

Opinions about the economic impact of war are unavoidably tainted by opinions about its desirability, making it difficult to separate propaganda from analysis. Some say an Iraq invasion would be over in weeks, because Iraqi troops and government officials are thought to be eager to surrender. Others say laying siege to Baghdad, a city the size of Los Angeles, could be as risky as "Blackhawk Down" and prolonged for many months by U.S. commitments to minimize civilian casualties. After getting past that urban warfare hurdle, we would then face uncertainties about refugees and occupation.

Iraq's southern Shia, western Sunni and northern Kurdish tribes have been held together by brute force, and they may prove no more cohesive a "nation" than Yugoslavia. Some Iraqis who welcome liberation may violently resist occupation. Despite heroic talk about building a model democracy in Iraq, just keeping the place from coming unglued could be a chore.

Alan Reynolds

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