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Will The Floods in Pakistan Wipe Out The Markets Here?

Want to get scared about a devastating blow to the financial markets?  Of course, it's impossible to predict the future, but just consider the plausibility of the following:

Let's make a not-too-difficult to make leap of judgment and assume that Pakistan is going to be an absolute disaster.  The numbers of people already dislocated and abandoned is measured in the millions.  They live in an enviroment where the infrastructure has been largely destroyed, and where disease is about to spread.  The people have lost their possessions and whatever wealth they may have had before the floods.  Food is soaring in price already and is likely to remain scarce for a very long time.  The government is largely incompetent; they make the Bush Administration's of Hurricane Katrina look like a model of efficiency and great political judgement.  Already, terrorists are exploiting the situation, providing aid and invoking their message.  The world population is responding, but the response has to be dampened coming so soon after the response to the Haiti earthquake.  The list of difficulties can comtinue; it's staggering.

Now let's assume we're in the White House.  We have a problem.  Pakistan is at risk of imploding.  Even if the risk of that actually happening is slim, the consequences of political upheaval could be dire, even if shy of resulting in total chaos.  Unlike Iran, Pakistam actually has a proven nuclear weapon.  It has been at war with its neighbor India, a major US political and business partner, and the relationship between India and Pakistan continues to be tenuous.  Terrorists already controlled parts of Pakistan before the floods; they have their sights set at other sections and not wasting time in pursuing their goals.  How much risk will the US be able to take?

If the conditions in Pakistan remain relatively subdued in the US news media, the White House will have a difficult time rallying the support necessary to pump money into Pakistan to mitigate the risk of a political implosion at worst and instability at the very least.  But if the US sits by and the terrorists assert more power and visibility,  the possibility increases that images of a Taliban-controlled Pakistan will eventually rocket to the front pages and the top of the political debate.  What then?  Will the US even have the wherewithal to do something such as sending in troops and/or boosting aid or various other initiatives?

In any event, how will investors react?  What will investors do if the Obama Administration begins to increase the aid they are giving to Pakistan in money and other resources (for example, we have already sent helicopters to aid in the relief effort)?  At what point do people start complaining about the increase in costs and cite that as adding even more debt on the nation's balance sheet, rendering a financial recovery even more diffcicult?  Those expenses certainly aren't going to make the market go up.

And how will investors react if Obama defers the political issue, the terrorists assume at least some degree of more significant political power and another military front becomes necessary? 

In essence, Pakistan is on the verge of becoming a major political issue for the US that will translate into a financial and economic issue that will, in turn, most certainly create a market reaction.  Watch the news. 

Disclosure: does not apply