by Thomas Wash | PDF
At nearly 5,000 nuclear warheads, Ukraine had one of the largest nuclear arsenals in the world on its territory. If Ukraine hadn’t transferred those weapons to Russia in 1996, it is unlikely that Moscow would have invaded. North Korea believes it is facing a similar threat which is why it has fought to maintain its nuclear program.
In North Korea’s first nuclear test in 2006, the bomb generated the equivalent of a 4.7 magnitude earthquake. In its next attempt in 2009, the bomb was four times stronger. The bombs tested in 2016 and 2017 each yielded more power than the atomic bomb dropped on Hiroshima in 1945. In short, North Korea clearly has the ability to develop and produce its own nuclear weapons. The country’s ability to deliver a nuclear weapon against the U.S. or any other adversary is less clear, but a flurry of recent tests suggests it is making incremental progress in its missile technology.
This report will focus on North Korea’s nuclear program and the implications for the rest of the world if North Korea is capable of striking the U.S. with a nuke. We start with a brief history of the country’s nuclear weapons program and discuss how the rest of the world has tried to denuclearize the country. Next, we examine North Korea’s current military capabilities and potential threats to the global order. As usual, we conclude with the potential impact on financial markets from these events.
by Bill O’Grady and Patrick Fearon-Hernandez, CFA
(This is the last report for 2019; the next report will be published January 13, 2020.)
As is our custom, in mid-December, we publish our geopolitical outlook for the upcoming year. This report is less a series of predictions as it is a list of potential geopolitical issues that we believe will dominate the international landscape for 2020. It is not designed to be exhaustive; instead, it focuses on the “big picture” conditions that we believe will affect policy and markets going forward. They are listed in order of importance.
Issue #1: U.S. 2020 Presidential Election
Issue #2: Iran
Issue #3: China’s Debt
Issue #4: Demographics
Issue #5: North Korea
by Bill O’Grady
As is our custom, we update our geopolitical outlook for the remainder of the year as the first half comes to a close. This report is less a series of predictions as it is a list of potential geopolitical issues that we believe will dominate the international landscape for the rest of the year. It is not designed to be exhaustive; instead, it focuses on the “big picture” conditions that we believe will affect policy and markets going forward. They are listed in order of importance.
Issue #1: The Political Fragmentation of the West
Issue #2: North Korea
Issue #3: An Unsettled Middle East
Issue #4: A Resurgent Russia
Issue #5: China’s Financial Situation
by Bill O’Grady
(N.B. Due to the Independence Day holiday, our next report will be published on July 10th. That edition will be our Mid-Year Geopolitical Update.)
Last week, we offered background on the situation with North Korea. We presented a short history of the Korean War with a concentration on the lessons learned by the primary combatants. We also examined North Korea’s political development from the postwar period through the fall of communism and how these conditions framed North Korea’s geopolitical situation. We also analyzed U.S. policy with North Korea and why these policies have failed to change the regime’s behavior.
The primary concern is that North Korea appears on track to developing a nuclear warhead and a method of delivery that would directly threaten the U.S. This outcome is intolerable and will trigger an American response.
In Part II, we will discuss what a war on the peninsula would look like, including the military goals of the U.S. and North Korea. This analysis will include the signals being sent by the U.S. that military action is under consideration and a look at the military assets that are in place. War isn’t the only outcome; stronger sanctions or a blockade are possible, as are negotiations. An analysis of the chances of success and likelihood of implementation will be considered. As always, we will conclude with market ramifications.
by Bill O’Grady
Tensions with North Korea have been escalating in recent months. The regime has tested numerous missiles and claims to be capable of building nuclear warheads, which, combined with an intercontinental ballistic missile (ICBM), would make the Hermit Kingdom a direct threat to the U.S. Such a situation is intolerable to the U.S., and thus there is rising concern about an American military response.
In Part I of this report, we will recap the Korean War, focusing on the lessons learned by all sides of the conflict. We will discuss North Korea’s political development through the postwar period and the fall of communism. This examination will frame North Korea’s geopolitical situation. The next step will be to analyze U.S. policy with North Korea and why these policies have failed to change the regime’s behavior.
In Part II, we will use this backdrop to discuss what a war on the peninsula would look like, including the military goals of the U.S. and North Korea. This analysis will include the military assets that are in place and the signals being sent by the U.S. that military action is under consideration. War isn’t the only outcome; stronger sanctions and a blockade are possible, and the chances of success and likelihood of implementation will be considered. As always, we will conclude with market ramifications.
by Bill O’Grady
Robert Gordon is a well-known economist who teaches at Northwestern University. He was a member of the Boskin Commission that assessed the accuracy of the CPI and is also a member of the National Bureau of Economic Research, the body that dates business cycles. Part of his research has focused on long-term economic and productivity growth.
In August 2012, he published a working paper suggesting that U.S. economic growth was “over.” Gordon’s thesis is that the first two industrial revolutions, the first starting in 1750 in England and the second in 1870 in the U.S., were so remarkable that nothing else has had a similar impact. Although Gordon does acknowledge a third revolution, the computer and internet revolution which began around 1960, he suggests the impact pales in comparison to the earlier two revolutions.
From there, Gordon argues that the jump in growth that occurred from the first two revolutions will not likely be repeated, meaning that growth will slow down to the pre-revolutionary trend. That isn’t to say that growth will become non-existent. Instead, growth will slow to around 1.5% per year permanently.
The geopolitical impact of such a slowdown would be significant. The global superpower generally is dominant in both the military and economic spheres. It will be difficult for the U.S. to maintain such dominance with such slow growth. Not only will fiscal restraints develop because of this slow growth, which will make military budgets problematic, fulfilling the reserve currency role and the global importer of last resort function will become nearly impossible as well.
In this report, we will discuss Professor Gordon’s thesis, examine the geopolitical impact if he is correct and offer some criticisms of his thesis. We will conclude with potential market ramifications.
 NBER Working Paper 18315, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” Aug 2012.