Jewish World Review Sept. 8, 2003 / 11 Elul, 5763

Stratfor Intelligence Brief by
George Friedman

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The economy and al-Qaida


http://www.jewishworldreview.com | There has been a sudden spate of positive economic news in the United States. The July 30 "Beige Book" report from the Federal Reserve Bank indicated a strengthening economy. Business investment increased by 7 percent, and we've had two consecutive weeks of falling jobless claims.

Most important, the Gross Domestic Product rose at an annualized rate of 2.4 percent in the second quarter, substantially more than the roughly 1.5 percent growth rate that was predicted and an increased clip over the first two quarters.

Our view has been that the U.S. economy would strengthen in 2003, that there would not be a "double dip" back into recession and that deflation - in the Japanese model - is a very unlikely outcome. We have adhered to the view that the recession was a cyclical event, necessary and healthy, after about nine years of extreme growth, and that there will be a strong recovery. A 2.4 percent rate is not yet a strong recovery, but it really isn't all that anemic, either.

The real issue now is whether the rate of growth will increase to 3 to 4 percent by the end of the year. That is somewhat dicier, but the fundamentals of the U.S. economy are quite strong.

The geopolitical fundamentals are the real question. The one thing that can really hurt the American economy would be an al-Qaida attack equal to or more powerful than 2001. This is not only a psychological event.

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Like any economy, the U.S. economy has physical vulnerabilities that, if attacked, could degrade the economy substantially. The attack on the World Trade Center had the effect - intended or unintended by al-Qaida - of shutting the financial markets and smashing the airline industry. An attack deliberately aimed at a key infrastructure could do more.

The problem here is psychological. If we can see the risk, so can everyone. People placing economic bets have to take into account the inherently unpredictable nature of an al-Qaida attack. There is absolutely no certainty that one will be attempted, none that it would succeed and none that it would be effective against economic targets.

In short, it cannot be counted on - or discounted. This has to have a depressive effect on a range of economic decisions. It is certainly not a strong enough consideration to abort a recovery, but it is enough - even if nothing happens - to take the edge off.

Everything comes back to the intentions and capabilities of a shadowy group of men who might no longer exist or who might be on the verge of a calamitous event. We simply don't know and neither does anyone else - not for sure at least.

By our logic, an attack is likely, but even if our logic is correct, it does not mean that it would succeed. This is the real constraint on rational economic planning. How do you plan with a wild card like that? Retired U.S. Navy Adm. John Poindexter, who took the fall for Iran-Contra, thought he had an idea: setting up a market in terror futures. The theory, and it was an interesting one, was that a futures market in terror could help predict terrorist attacks.

If we assume that markets are efficient information processors, or more simply, that terrorists would try to make a killing in the market by going long on terror before they attacked - this could become a superb predictive mechanism. Alternatively, as in all futures markets, investors could hedge their bets in the market, increasing security.

The sheer insanity of the idea should not diminish its brilliance. Like Iran-Contra, in the abstract it is a superb idea. It was merely the application that did not make sense. How do you quantify terror, and what is the underlying commodity?

No matter - Poindexter resigned after it was revealed that the Defense Advanced Projects Agency was toying around with the idea of implementing this idea. That's disappointing, as we'd personally like to wrap our 401K around a December contract.

As August begins, we are coming into the zone. The problem is that we don't know when the zone ends. The very nature of al-Qaida's threat is that it is a diffuse, uncertain network. Its origins are murky and so is it's future. Therefore, when will the thread end?

The economy can live with good news and bad news; what it can't live with is uncertainty. And that is the real long-term challenge of al-Qaida to the economy. The fundamentals are solid now. It's the wild card that's frightening.



George Friedman is president of Strategic Forecasting, Inc., one of the world's leading global intelligence firms, providing clients with geopolitical analysis and industry and country forecasts to mitigate risk and identify opportunities. Stratfor's clients include Fortune 500 companies and major government. Comment by clicking here.

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