Ad Hoc Commentary – the many short term benefits of restarting the Cold War through Syria

Reagan and Gorbachev ended the Cold War. If Obama bombs Syria, he would likely be remembered in history as the president that restarted the Cold War. Let us put aside our conscience for the moment as we look at the benefits. Killing your fellow human is wrong morally. Period. But if we put our conscience aside for the moment, we can perhaps see why some of the elites like the idea of war:

Benefit #1: Reduces the risk of social unrest
In realpolitik, the Cold War was a splendid invention. Hiroshima and Nagasaki opened the eye of the masses to the power of the atom. And the Cold War became the glue that united the people against the horrendous threat of the atom. Sport loving Americans knows this by heart: if you are united against the other team, there will be almost no differences within your team. The social cohesion benefits of the Cold War should never be underestimated. In the age of war, the misery index (as measured by unemployment rate plus inflation) can go much higher before triggering social unrest.

Today, severe income disparity (refer to Figure 2 on Page 8 of the following report is the biggest fear out there. The war could divert the attention outward.

Benefit #2: Reduces the problem of Youth Unemployment

Everyone is talking about the scourge of youth unemployment that is affecting the world, especially the Middle East and Europe. An easy solution to the problem is to send the young boys and girls to war. That would bring down youth unemployment.

Benefit #3: Postpones the debilitating debt ceiling fight

Support for congress is at a historical low:

“…Two likely reasons are the sluggish economy and Congress’ seeming inability to address the major problems facing the country, including the economy, the budget deficit and federal spending, and gun control…”

If we go to war, then the very divisive debt ceiling fight will take a back seat. Congress would likely welcome the relief from having to engage in brinkmanship on this once again. It might be entertaining to watch the first few innings of a debt ceiling fight, but after a while, many will dismiss it as a joke and a sign of congress’ ineptness. That is bad for approval ratings. The alternative is to be heroes in the new Cold War that was started by the president without their official consent.

Benefit #4: The US equity and bond market will likely do well

The uncertainty leading into the war might not be good for the equity markets. But ultimately, when the uncertainty is removed, our favorite Dow Jones will rally from zero to hero. Escalation of the Syrian conflict will ultimately lead to instability in Europe. Capital is like a dove that flees war, it will prefer America.

The war will also postpone the day of reckoning for US treasuries. Looking at the Treasury International Capital (TIC) data in detail:

Yours truly found that the current capital outflow in US treasuries and government agency bonds is similar in magnitude to that during the period from Dec 2008 to Mar 2009. In Mar 2009, the money printing by Uncle Ben Bernanke via QE1 saved us. This time, the war in Syria will help us.

Conscience aside, the above are the main benefits that would be very tempting to the political elites. However, the problem with war is that it is far from unpredictable. We can probably take the unpredictability of Iraq and Afghanistan because even if it went catastrophically wrong there, America will still be here tomorrow.

That is not the case with Syria. Syria has Russia. If it goes catastrophically wrong in Damascus, America might get badly wounded. Chemical weapons will be the least of our worries. When that happens, it is far from guaranteed that the Americans will rally behind their government.

One thing is for certain, Syria would lead to the fall of the United Nations as the invasion of Abyssinia by Italy in 1935 lead to the failure of the League of Nations. Even though the myopic benefits are very tempting, it might be better for cooler heads to prevail. However, just as my old boss once told me, it does not matter. The decisions had been made. After all, it is human nature to overestimate the short term gains, while underestimating the long term perils.

Good luck in the markets.