World economy and the global financial world could end up in a deep crisis, more severe than the one in 2007-2008, after a series of domino effects. In its recent ‘Korea-report’, Capital Economics – a London company producing economic, security policy, and financial prognoses – says if the war broke out, it would be the first conflict since WWII that would involve the United States, which generates 22 percent of the world’s GDP. We interviewed one of the creators of the report.
Péter Zentai: The quickly escalating American – North Korean conflict could even end up in a nuclear catastrophe. The stock exchange, however, seems to ignore it. Is it logical?
Gareth Leather: If such critical situation, like the one between North America and the USA, escalated anywhere else in the world, there would more likely to be panic on the stock exchange. However, in the past 50-60 years, international investors learnt that if they believe any ‘war-rhetoric’ of a tension, then it shall not be the one coming from North Korea. Stock exchanges routinely ignore – based on experience – war news from North Korea.
World economic, safety policy, and international financial forecasts cannot allow this ‘luxury’…
Especially, since there is no guarantee that no war will break out in an objectively hotbed of war, simply because there has not been one yet. It could escalate even after coincidences or intentional provocations that are based on bluff.
What are the primary ‘lessons’ of that model calculation you produced about the possible economic and financial consequences of a war in North Korea?
Certainly, an immediate and severe downturn is expected, while in case of a prolonged conflict, there is real chance for a collapse in the world economy via a series of domino effects. The disruption of global supply chains would be the result of the simple fact that the United States, that generates 22% of the world GDP would be one major figure in the war. South Korea, another key economy, would be in grave danger in such a scenario, so it would also have an impact on the world economy.
America has waged several wars over the last decade: twice in Iraq, then in Afghanistan, earlier in Vietnam, and in Korea in the 50s… – yet, we did not have to worry about facing a collapse of world economy. Why would it be any different now?
Because even though, the two main figures of this potential military conflict are about ten thousand kilometres apart, North Korea can reach American shores with its missiles. According to the Pentagon, Pyongyang needs only a little time to install nuclear warheads on these – now indeed existing – missiles. Never before has the United States waged war against such an opponent. This means that this would be the first war where the United States could directly suffer enormous losses. Not to mention that since WWII, the war in Korea, which hopefully was the last one, has been the darkest and the most fatal one in the 50s – both militarily and economically. Only in South Korea 1.2 million people died, and the country lost 4.2% of its GDP – today its current value is 780 billion dollars.
If North Korea can really reach the American continent, would the outbreak of a war immediately start domino effects?
The world’s most crucial supply and trade routes that connect Asia with Europe and America would be crippled right away. After that, the global cash-flow would begin to slow down, just like it did in 2007-2008. According to our prognosis, worldwide price explosion and inflationary spiral would take place. The faith in the dollar, the currently most important currency would be shaken everywhere. Furthermore, a war in Korea would significantly increase the American government debt too.
Original date of Hungarian publication: August 16, 2017