The Middle East is hopeless, but not serious

[barb162]

Feb 6, 2007

The Middle East is hopeless, but not serious
By Spengler

"Hopeless, but not serious," was the cafe quip about the Austro-Hungarian monarchy before World War I. Now that a consensus has emerged that Iraq's position is hopeless, the next question is: Is it serious? Judging from financial markets, the answer is, "Not in the least." The same is true for the Israel-Palestine problem.

Some years ago I suggested that option theory offered insights into geopolitics. During the Cold War, the Soviet Union was the spoiler, seeking advantage from instability, while the United States sought to maintain stability. In financial parlance, the Russians were long volatility; they stood to exercise their political options opportunistically, and the more chaotic and uncertain the state of the world, the better for Moscow. For the past 20 years, though, it is Washington that is long volatility; in the absence of a contending superpower, instability frightens all contending parties into seeking help from Washington. The more unstable and uncertain the world, the stronger the position of the United States. Whether or not the US recognizes this is beside the point; the fact that President George W Bush has made a dog's breakfast of Iraq makes America's world position stronger.

A friend in financial markets observes that the world appears to be safer than at any time on record, judging by the cost of insurance against economic disaster. That is, the cost of buying options on the Standard and Poor's 500 stock index stands at the lowest level since 1986, when options on the index first were traded. Investors who fear catastrophe pay for the option to sell the S&P 500 Index at a fixed price. If it falls far below that level, they earn a windfall. The price of options is measured in terms of "implied volatility", a concept that interested readers may investigate for themselves. <1>

Now, the fact that the financial market believes the world to be safe does not prove that it is safe. Professor Niall Ferguson of Harvard observes that world markets anticipated the outbreak of neither World War I nor II. As he observed in the January edition of The Atlantic Monthly, the predicament of Sunni, Shi'ite and Kurd resembles that of the European powers just before the outbreak of the World War I in 1914. <2> I made a similar argument last year. <3> The difference is that everyone cared if Germany, France, Russia and Britain went to war. No one today cares if Sunnis kill Shi'ites in Iraq or Lebanon, or Hamas and Fatah fight to the bitter end in Gaza - provided, of course, that US aircraft carriers keep the oil flowing through the Persian Gulf.

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http://www.atimes.com/atimes/Middle_East/IB06Ak01.html