(from http://www.sf.indymedia.org/news/2002/11/1543433.php )

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http://www.morganstanley.com/GEFdata/digests/20021115-fri.html#anchor1

Global: War and US Foreign Capital Needs Do Not Mix

Joe Quinlan/Rebecca McCaughrin (New York)

We suspect that the looming threat of war between the US and Iraq is increasingly affecting foreign investor sentiment towards the dollar and US assets. Against this backdrop, as the drumbeat of war grows louder, downside pressure on the US dollar may mount due to increased selling of US securities by foreign investors.

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So, even if the US dollar weakens in the near-term as foreign investors pare their demand for US assets in anticipation of war, dollar bulls take comfort in history and the penchant of investors to re-enter the US almost as quickly as they left once the conflict subsides.

We are sympathetic to this view, but think investors should be mindful of some critical differences today compared to the last war with Iraq. First, the conflict is about "regime change" and would potentially leave the US as an occupying force in the Middle East. That stands in sharp contrast to the role the US assumed in the first Gulf war, when US forces were liberators, freeing Kuwait from the clutches of Iraq. Today, engaging Iraq would entail much greater responsibility in the postwar period, which could end up being far longer and costlier to the US than the actual combat. This could temper foreign investor confidence in the US and prevent a quick snap-back in inflows.

Moreover, during the first Gulf War, America's current account deficit was not nearly as large, and America's dependence on foreign savings was not nearly as important as it is today. Indeed, the US current account deficit totaled $79 billion in 1990 and accounted for just 1.4% of US total output. Today, the deficit is running at an annual rate of $485 billion and is approaching 5% of GDP.

In addition, should history repeat itself and foreign investors scale back their demand for US assets, the impact on US financial markets could be more pronounced than expected since the level of foreign holdings of US assets is much higher today than a decade ago. Indeed, foreign holdings of US Treasuries, agencies, corporate bonds and US equities are presently at or near record highs, meaning any sudden selling by foreign investors will have an even greater impact on US markets than in previous years.

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According to the largely discredited Efficient
Portfolio Theory, logic and reason rule, and drive
investment monies impartially to the highest risk
adjusted rate of return, all other things being
equal.

But logic is overrated in markets. Money is not
always logical.

Look at it this way. Nearly everyone, including
moi, despises the use of terror and the initiation
of force to achieve political objectives. Thus,
many people can equally despise Islamic terrorism
and US militarism. Opinions differ of course, but
inside the U.S. the Bush Regime has managed to
alienate a vast segment of the populace. That being
so, imagine how popular the Bush Regime is outside
of the U.S. Now, if the Bush Regime and its
evil policies (that have very little to do with
'defense' in the normal sense of the word) are
despised and are equated emotionally with the
U.S. itself, how likely is it that foreign
investors will rush to invest in AmeriKa? That would
be like funding the Third Reich -- sure, some
companies and persons (like Bush's grandfather)
happily funded the war machine of the Reich, but
for others it was anathema (suicidally stupid.)

So, unless the Bush Regime becomes much more
diplomatically astute, it is quite likely that
2003 will be another bad year for the markets,
and perhaps that will spill over into the economy.
Then 2004 won't look so good. And perhaps we
will see some real regime change -- where
it might do the most good! No better way to
Liberate Amerika than to boycott the F out of
it. Just say 'No', or 'No thank you!'