No matter how deeply he or she gazes into the crystal ball, the world’s most far-sighted economic guru would not find it easy to predict the long-term outcome of the current Global Financial Crisis (GFC).  So it might seem a bit premature to start drawing inferences from the collapse of renowned financial firms, market gyrations, and massive government interventions, especially if these inferences relate to the Global War on Terrorism (GWOT).  Nonetheless, there is a compelling reason to endeavor to do so:  correctly assessing the impact of the GFC and its economic consequences on how the War can or should be fought may save us from making serious errors.  Considering how many serious errors have already been committed in both the GWOT and the GFC, this seems highly desirable.

We can posit three scenarios of how the GFC might play out:  1) financial markets will respond well to inputs of government funds, and trust will be restored, with a gradual diminution of volatility and a slow, expensive healing of the financial systems of hard-hit countries even as economies emerge from a brief period of stagnation or recession; 2) volatility will continue, and much of the world will experience several years of fairly serious recession, with significant unemployment and other economic and social damage; and 3) stock market crashes will lead to a worldwide second Great Depression.

Arguably all three scenarios would have a major impact on the GWOT, and certainly Scenarios #2 and 3 would.  What can be reasonably forecast?

First, with tax revenues going into bailouts, the U.S. and other NATO countries will need to curb or cut military spending.  Expensive weapons development projects are apt to take a hit.  Maintaining legacies of the 1950s such as our tens of thousands of troops in South Korea will look increasingly ill-advised in a world of GWOT and GFC.  Pulling back from such positions can free up troops, equipment, and funds.  Ironically, this would make them more available for places like Afghanistan and thus could fuel the GWOT.

Second, spending on costly homeland security projects (e.g., protection of nuclear reactors and chemical plants against terrorist attacks) will seem less urgent.  A lower level of preparedness will become more acceptable. 

Third, paying inducements to allies, partners, and tribesmen might become harder to do and harder to justify.  NATO allies and other partners are likely to pull back from their commitments in order to salve the wounds of their home economies.  Even if they could afford to maintain their commitments, the GFC gives them an excellent excuse not to do so.

Fourth, the U.S. involvement in Iraq will be viewed increasingly from the financial perspective, and more American taxpayers will support withdrawal.  Taxpayers may come better to appreciate the true burden of the Iraq War on American society and economy–much larger than its cost to the U.S. Government.  So the GFC will make us more likely to withdraw from Iraq and to do so sooner than we might otherwise do.  And our withdrawal will be more complete.

Fifth, the woes suffered by many Americans and others because of the GFC make it much more difficult to whip up enthusiasm for the GWOT.  It is not yet clear whether the public will view the GWOT as one of the contributing causes of America’s economic troubles.  The egregious behavior of former Federal Reserve director Alan Greenspan in lobbying the White House to attack Iraq even as he blithely neglected the financial problems that were starting to emerge illustrates the kind of linkage the public might make.

Sixth, the GFC has delivered yet another blow to America’s prestige as our financial mismanagement, indebtedness, lowered economic prospects, and quasi-socialist government interventions in the marketplace make us a target of critics worldwide, especially since it was our mortgage and derivative mess that caused the GFC in the first place.  So the U.S. has become an even less attractive partner in the GWOT for the various governments and groups around the world that rely on us.

Seventh, the GFC has caused a drastic drop in the price of oil, reducing the clout of various producing countries dependent on the outcome of the War on Terrorism.  How exactly the GFC will affect the price of Afghanistan’s opium is not yet clear, but we can assume that demand will drop and so will the price.  That would reduce the income of the Taliban narcoterrorists.  Al Qaeda’s revenues would also drop somewhat.  So both the Taliban and al Qaeda would have to scale back operations.

Eighth, the GFC puts countries like China with strong finances and economies in a position to wield more influence.  In a world where America’s indebted economy is at risk, the relentless rise of China will oblige the United States to devote more resources to dealing with its own weaknesses vis-a-vis China, and therefore it will have fewer resources to invest in the GWOT.

A Freeze on Escalations

Even if the next administration in Washington renounces the entire concept of the GWOT and follows experts’ advice to withdraw from Iraq while supporting police actions against al Qaeda, it will still face a difficult decision in Afghanistan.  Before the GFC, the war in Afghanistan enjoyed very widespread support from America’s political elite.  The Bush Administration has been preparing for an escalation of the U.S. military presence.

But the GFC radically transforms the framework in which this decision is being made.  In a time of economic crisis, any business should impose a freeze on new investments.  If we apply this principle to Afghanistan, then putting more troops and dollars into that high-risk venture in the midst of the GFC seems most imprudent–a potentially serious error.  The same holds true for our mini-escalations in Pakistan and Somalia.

It is likely that the GFC will put a damper on the ability of both sides to wage the GWOT.  We should take advantage of the uncertainty that the GFC embodies to freeze all new investments in the GWOT until we achieve a much better understanding of when and how the GFC will end.  Before we can hope to withdraw from the follies of the War on Terrorism we must first stop digging ourselves deeper into this hole.  So in this sense, at least, the Global Financial Crisis can be a blessing in disguise.

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