After Bin Laden, Financial Day of Reckoning Looms

by: Dave Lewis

Osama bin Laden has been killed in a firefight with U.S. forces in Pakistan and his body has been recovered.

Almost a decade ago, bin Laden, in hopes of, according to some reports, inspiring a jihad and bleeding U.S. financial strength, inter alia, welcomed the attacks on the Twin Towers and Washington D.C.

Now, only his ghost remains. The jihad has thus far been thankfully quashed, but the U.S. has been bleeding financially for that decade.

What next?

Aside from a substantial increase in Pres. Obama's political capital, which might deflect the right wing's attempts to dismantle the welfare state, inter alia (and thus indirectly shift market sentiment, to wit, increase negative sentiment on U.S. bonds), direct effects on market psychology and prices, at first blush, include:

  1. A temporary (duration dependent on, among else, announced U.S. policy changes in the next few days) resurgence in dollar assets, and consequent decline in gold and silver. A rise in U.S. debt market prices.
  2. Increased speculation on overseas troop levels in Afghanistan - will they be brought home, will they be redeployed, will they remain the same?
  3. Will the Islamic world, in the event troops remain in Afghanistan or are redeployed either in Iraq or Libya, come to the view that U.S. peacemaking is colonialism in disguise?
  4. Medium term, a status quo military presence in the Islamic world, with a significant cause célèbre removed, will not only continue to negatively impact the U.S. budget, it may also increase Islamic resistance (thus further increasing the price of military action), and reduce foreign willingness to finance what may seem more like colonialism than peacekeeping.

The ball is in the Obama administration's court. Like 9/11, this is a key pivot point.

Much has changed in the U.S. over the past 10 years. Will this opportunity to change course be grasped, as a similar opportunity was grasped in the aftermath of 9/11? What, if any, will the new course be?

From a financial perspective, this seems to me a wonderful opportunity to begin to significantly reduce military expenditure without losing face at home. U.S. military adventures abroad since 9/11 brought forward the U.S. budget's "day of reckoning" by many years. Either the U.S. buys some time by reducing such expenditure or the financial day of reckoning will continue to creep forward.

Without the goal of bin Laden's capture as cloak of respectability, assuming military deployments continue unchanged, the financial day of reckoning might leap instead of creep forward as foreign demand for U.S. debt and willingness to sell oil "cheaply" dries up further.

Disclosure: Long Gold