Terrorism Tax

November 16, 2015

Although hardly a new 21st century phenomenon, the presence of terrorism and its economic fallout escalated in the wake of the September 2001 attacks.  It’s been a lose-lose force because a dampening impact on real GDP growth results whether victimized nations over- or under-react to the extreme Jihadist challenge to their way of life.  In the 19 years from the third quarter of 1982 through the third quarter of 2001, U.S. nominal and real GDP growth had expanded at a robust per annum pace of 6.4% and 3.6%, respectively.  Employment advanced 2.1% per year.  Over the ensuing 14 years through and including last quarter, nominal GDP, real GDP and jobs advanced by annualized rates of only 3.6%, 1.9%, and 0.6%, in contrast.  The DJIA, which had appreciated 14.1% annualized in the earlier 19-year period prior to 9/11, shows a net expansion rate of 4.2% per year since that line of demarcation.

That being said, the U.S. economy has performed better than the average advanced economy.  During the last 14 years, Japanese real GDP went up 0.8% a year, and nominal GDP was unchanged because of chronic negative price pressure.  Real GDP growth in the eurozone also averaged 0.8% per year.  Emerging economies have shifted gears more sharply and more recently than the developed ones.  Chinese growth averaged 9.4% in 1997-06, spiked to 14.2% in 2007, and 9.7% on average over the next four years through 2011.  The pace was only 7.6% in 2012-14 and is not likely to exceed 6.5% in 2015-16.  Brazil and Russia, which also belong to the formerly envied BRIC Group, are now struggling in recession.  China is the largest importer of commodities, so its slowdown generates substantial negativity for a slew of commodity exporters. 

The history of modern terrorism shows no sign of being contained.  The element of surprise in the downed Russian plane over Egypt and the attacks in Beirut and Paris belie any sense of a quick resolution.  The metaphor of Dylan’s Miss Lonely — when you have nothing, you have nothin’ to lose — seems to fit well.  Many factors are feeding terrorist recruitment, and one in particular, climate change, is evolving exponentially.  Moreover, the latest spike in terrorism was imposed on Western economies that softened last quarter.  U.S. and eurozone real GDP growth slowed to 1.5% and 1.2%, while the Japanese economy contracted for a second straight quarter.  This has been Japan’s fifth episode of multiple consecutive quarters of negative GDP growth since 2008.

Conventional wisdom believes that late-2015 finds the dollar ideally positioned for additional strength because of comparatively better growth, a manageably-sized U.S. current account deficit, divergent monetary policies between the Fed and other central banks, fairly subdued U.S. inflation that will underlie the gradual speed of U.S. monetary policy normalization, and now geopolitical chaos that will generate capital flight to the safety of U.S. assets.  At its low on September 30, the dollar traded at $1.1264 and has risen about 5% subsequently.  The yen, however, has hardly changed.  For that matter, the yen on 9/11 was at 121.89/USD, just about where it is now, while the euro is still some 19% above its level on that fateful day of infamy.  Fact is the euro has taken considerably longer to reach parity with the euro than conventional foreign exchange market wisdom has been predicting all year. 

Currency determination is a complicated process under the best of circumstances.  The omnipresence of terrorist threats makes these days anything but ideal for forecasting.  Win or less, the challenge to contain terrorism and do so without making ordinary living unrecognizable will continue to impose a tax on western and eastern nations.  The incidence of this penalty is not spread evenly around the world.  Nor is it a constant within individual nations.  It spoils and delays attention to other urgently needed policy repairs, and it corrodes and corrupts the political institutions and effectiveness of the Jihadists’ enemy.  For currency market participants, the bottom line is that no forecast in these times should be viewed as a slam dunk.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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