by Archie M. Richards, Jr., CFP^®
November 12, 2001

Before the September 11 disaster, I predicted that the next ten years will prove marvelously prosperous for the world's people and for investors in stocks. Despite the recent travails, I still think so.

In comparison with earlier wars, the War on Terror will cost relatively little. During World War II, for example, military spending for 1944 peaked at about 65 percent of the total prewar economy. During the Korean War, the equivalent figure was about 11 percent.

The economy has since grown much larger. And as wars come to resemble international police work, they get cheaper, causing them to count for less and less.

The monetary loss of buildings, planes, and the productive capacities of people killed in the September terror is $30-to-$60 billion. Call it $60 billion, max. This is only 0.6 percent of the gross domestic product (GDP), a measure of the entire domestic economy.

Add a defense buildup of 1.5 percent of the GDP over next couple of years.

I expect future terror attacks to be insignificant. But even if I'm wrong, the total costs probably won't amount to more than 0.3 percent of the GDP.

Overall, we're looking at total costs of 2.5 percent of GDP, max. Half of these costs should stimulate the economy. The economic impact of the war will be less than you might think.

Here's good news the press has hardly noticed: Iran is undergoing a revolution. Hundreds of thousands of Iranians during the last month have demonstrated in opposition to their government. The mullahs have reacted by confiscating satellite dishes, probably hastening their downfall. Over half of Iran 's population is under 25. They want freedom from the mullahs' terror. Many of them are wildly pro-American. This is wonderful for them and wonderful for us.

Another source of progress: The U.S. military generates incredible technological advances. Raytheon's infrared vision system, for example, senses minute differences in heat, even the differences emitted by different colors on a cloth. The device can distinguish the red stripes from the white on an American flag, at night, in the fog, from four miles away

When technologies of this sophistication become cheap enough to be used widely, they will bring enormous improvements in people's lives. It won't take long, either. The companies that make such products should generate enormous profits, resulting in higher stock prices.

Here's unfavorable news: Even though the Federal Reserve Bank is pumping out plenty of money, the U.S. Comptroller of the Currency, which regulates banks, is keeping the money from reaching the companies that need it.

Substantial bank loans made to technology companies in the late-1990s were defaulted. For the past year, the Comptroller has therefore forced banks to buy Treasury securities and rebuild their reserves, rather than to make business loans. Starved for cash, American businesses have had to reduce inventories, stretch out payments to vendors, and lay off workers. The credit crunch is a key reason why the U.S. has suffered the sharpest drop in industrial output in the last twenty years.

The Fed is making money available, while the Comptroller is making it unavailable to those who are so important - large and small U.S. companies. President Bush should get the two agencies to work together. Failing this, the Federal Reserve should take over all bank regulation, so that money creators and bank regulators can work from the same page.

The credit crunch is serious, all right, but I don't expect it to last long. Meanwhile, the war is going well. The price of the dollar in terms of other currencies is holding up nicely, a good sign. We'll get past our current problems. With the stock market already down, it's certainly not the time to sell.

The next ten years will be surprisingly positive. Most pundits expect stock prices to advance at a relatively slow pace during the next decade. This is another reason why the advance is likely to be superior. The majority of pundits is usually wrong.

P.S. I think you can relax about further terror attacks. The chances of your ever being a victim of terror are probably less than your having an automobile accident the next time you drive to the grocery store.