The Blog

The Game of Risk

Uncertainty--economic and otherwise--sits just over the horizon. It could mean trouble for Iraq, and the rest of the world.

11:00 PM, Mar 22, 2004 • By IRWIN M. STELZER
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MADRID REMINDED INVESTORS of something they had chosen to forget--that there is risk out there that is unlike any other. It is possible to make an informed guess as to where the dollar is headed, or the price of oil, or the demand by China for the various commodities it is gobbling up at a furious rate. But those guesses are based on the implicit assumption that another terrorist attack won't disrupt commercial life in America, or oil production in Saudi Arabia, or force Britain to imitate Spain and pull out of Iraq.

We now know that such an attack is more than likely, somewhere, sometime. Here is a guess as to the time of maximum danger.

On July 1 America will be engaged in the largest troop deployment ever undertaken, exposing incoming and outgoing troops to attack, and replacing seasoned troops with a greener variety. The military says that the move will be complicated by the failure of Halliburton to have the new camps ready. Risk number 1: Vulnerable Americans, and troops unfamiliar with the territory, with the result of large casualties.

On July 1, absent some action by the United Nations, Spain will be withdrawing its 1,300 man contingent from Iraq, making it more difficult for the Anglo-American-Aussie team to persuade its allies to stick with them. Poland's leaders have already said that Spain's decision to cut and run is making life more difficult for them, and the Dutch prime minister did not use the occasion of his visit to the White House to reassure President Bush that his contingent will stay in place after July 1. America's staunchest ally, Australia, may well be in the midst of a general election. Risk number 2: Madrid-style attacks to force a further attrition in the ranks of the coalition.

On July 1 the coalition will be handing over sovereignty to the Iraqis--but to a group with no democratic legitimacy. Shia leaders have already announced that they don't feel bound by the document that is intended to order political affairs in Iraq until elections can be held. Risk number 3: Absence of any accepted political authority for a period of at least six months.

On July 1 it will be very hot in Baghdad. No surprise. But barring some miracle, there will only be adequate electricity for three to four hours each day. Tempers are more likely to flare, and not only in Baghdad. The authorities say that there is a more-or-less adequate supply of power being generated in the Basra area, but that they will institute rationing there in order to increase the flow of electricity to Baghdad. Observers recently returned from Basra tell me that the people of Basra have no intention of sweating in the dark so that their countrymen in Baghdad can get some minimal relief from the heat. Risk number 4: Riots by hot, irritated, restless Iraqis as the temperatures soar, and the "we were better off under Saddam" crowd begins to make its voices heard.

By July 1, the U.S. presidential campaign, already underway, will be in full swing. Senator John Kerry is blaming the loss of American jobs on the nation's appetite for goods made in China and elsewhere as well as on the outsourcing of jobs to India and other countries. Businessmen who open factories overseas are traitors, to be reviled and taxed. Risk number 5: A swing towards protectionism by President Bush as he fights for votes in Ohio, Illinois, Michigan, and other key states. Congress is ready for just such a move, and wants to prevent government contractors from sending work overseas.

WILL ANY OR ALL OF THESE RISKS materialize precisely on July 1? Probably not. But the risk of a major disruption is certainly mounting as we approach the summer. Those geopolitical risks might well coincide with a few unpleasant economic developments in the United States.

The last of the tax-cut stimulus will have been received and spent long before the summer. At that point, consumers won't be able to look to tax refunds to fuel continued spending. Moreover, OPEC's decision to cut oil production in the face of rising demand will drive up crude oil and gasoline prices to levels that force consumers to cut back spending on almost everything else. Unless business investment continues to improve, the economy might just slow down again. Meanwhile, with the federal deficit running at around 5 percent of GDP, the dollar weakening, and commodity prices rising under the pressure of booming Chinese demand for almost everything, inflation might saunter back onto the stage.

That, of course, would force the Fed to raise interest rates. The result might well be a fall in share prices, an end to the low interest rates that have enabled consumers to refinance their mortgages (and use the withdrawn equity to fund shopping sprees), and a drag on business investment.