Tuesday’s terrorist bombings have freed a lot of people to do things they know they should have been doing for a long time, but had not done for a variety of reasons. Although many analysts are now forecasting a sharp recession for the American economy, which in and of itself would probably cause a worldwide recession, I hold a contrarian view. I believe that the bottom of the well will be reached next week, and that the American economy will rise sharply thereafter.
The special issue of Business Week makes the case for a sharp recession: Falling travel will impact the airline and travel industry, insurance claims will take its toll on insurers, fear will slow consumer spending, and the stock market has normally fallen following exogenous shocksbad news from outside the stock market. These predictions are echoed by the Economist and analysts for the international edition of the Wall Street Journal and the Financial Times. For me to say that they are all wrong is a big leap. (Me? Contradict the Economist?)
The reasons I believe differently are as follows: First, the price of oil and gold rose quickly, but then dropped back in the direction of previous levels. This indicates that the most nervous (or most sensitive) of investors initially panicked, but now have had a chance to re-evaluate their positions. Second, the U.S. Federal Reserve has taken measures to insure liquidity, and market makers are working together to guarantee settlements and fair transaction pricing. This means that people do not need to make financial decisions based on the fear of the market not working.
Third, Congress has voted to spend a lot of money on recovering from the disaster, and has committed to spending a lot more in case of military action. This type of spending is normally what a national economy needs during an economic slowdown, but Congress had previously been reluctant to do so because of political promises to leave Social Security funds untouched. Fourth, the dramatic impact on American airline carriers will probably lead to governmental intervention on their behalf. This intervention will allow airlines to reduce prices, partly to stimulate business travel, and this stimulus will probably work. Defense Department spending, which would not have been much help if it had been focused on missile defense, will help the economy if it is channeled into what is already becoming a clich, “homeland defense.” The Federal Reserve will probably reduce interest rates by between .5 and 1 percentage points, and the European Central Bank will probably reduce rates as well, although not by as much, and although they will certainly say they are not working in tandem with the Fed.
Seventh, several areas of the American economy had begun turning upwards in the month before the attack, and this was reflected in small business owners’ attitudes and intentions, which became unexpectedly positive. It is impossible to over-estimate the importance of small business in the American economy. It is merely difficult to estimate at all, which is why we don’t hear about it enough.
Eighth, every day that goes by without unleashing the dogs of war reduces the chance that America will act like a spaghetti Western cowboy. Even the five days of grace given so far (I write this on Sunday) mean that the voices of reason are taking effect. There will be American military action, possibly next weekend, probably consisting of incursions into Afghan airspace and other countries, in an attempt to decapitate the leadership of several terrorist organizations. But it will probably not be the sort of war that everyone feared last Wednesday and Thursday.
Ninth, there are no great powers that will oppose American action against terrorism. Both Russia and China are deeply concerned about Islamic fundamentalist opposition to their governments, and will not be disruptive should America take action. Vocal support from the prickly French, the most likely to have objected to American action, basically has left the world as united as it was for the Gulf War.
Tenth, the Bush administration will be judged on how it handles this issue. There will be no sloppy half-measures permitted. Colin Powell, architect of the methodical destruction of the Iraqi army, should have enough influence to see to that.
I make no apologies for the clinical nature of this analysis. What is in my heart is not contained in these words. But business and political leaders will be making important decisions that will affect us all in the next week, possibly the next 48 hours, and I consider it important that they have access to more than the conventional wisdom, important enough to leave my feelings out of this.
Thomas Fuller is an independent Internet analyst based in Turin.
originally posted by: Thomas W. Fuller
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