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World order, war and the new protectionism

The new world order, established after the fall of communism in Russia and eastern Europe, is set to shatter. Global leadership by the US confronting the USSR was succeeded by US leadership flying solo. Now comes fragmentation. The US might be the most powerful nation but over the next few years its role will be contested by China, the EU, South Korea and even Japan. This implies a much higher risk premium for financial assets.

Any US victory in Iraq will be followed by a failure to win the peace. The Middle East will be destabilized. The US will waste lives and money. The Saudi regime will fall within five years. Energy prices will stay high but will act as a tax on global consumption rather than becoming a source of inflation.

A short-lived rally

So any equity rally on the outcome of the war will be short lived. There will be no lift-off because the US consumer will be paralyzed for at least five years because of gradual deflation of US debt and housing bubbles, and the erosion of wage power by Asian competition.

It's not just Iraq investors need to grapple with. Optimists argue that North Korea's Kim Jong Il is only after money to prop up his regime and is using the Iraq crisis to gain maximum leverage.

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