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The War On Terrorism Will Ignite An Economic




September 27, 2001
Copyright © 2001 CARIBBEAN BUSINESS. All Rights Reserved.

Does that headline sound familiar to CARIBBEAN BUSINESS' readers?

In our edition of Sept. 28, 1989, a few days after Hurricane Hugo had passed over the northeast sector of Puerto Rico, this newspaper reported that Hugo would bring a boom to the local economy.

We were the first to make such a prediction. At the time, Puerto Rico had not experienced a direct hit by a hurricane in 33 years--since Hurricane Betsy came ashore in 1956--so there was very little experience with this sort of disaster. Consequently, very few people on the island had any knowledge of the impact federal funds can have in an economy following natural disasters, compared with the top-of-mind awareness in the States, where massive floods and destructive cyclones take place every year.

Naturally, we would much rather that natural disasters not take place at all, but as a financial newspaper, we have to report what we feel will be their economic impact.

And just as CARIBBEAN BUSINESS foresaw the post-Hugo economic boom in Puerto Rico, we believe a similar result will ensue for all of the U.S., which includes Puerto Rico, from the war on terrorism just begun.

It is likely that the final casualty count in New York, Washington, D.C., and Pennsylvania will surpass 7,000 people. Those who suffered injuries will total an additional 6,000 at the least, for a total of about 13,000 or 14,000 people affected directly, plus the tens of thousands of families, friends, neighbors, and co-workers who will be seriously affected by the personal tragedies.

That darkness will soon yield to light, however.

CARIBBEAN BUSINESS has little doubt that the man-made disaster of these barbaric attacks and the ensuing war on terrorism will ignite an economic boom both on the U.S. mainland and in Puerto Rico, U.S.A., just as occurred following Hugo and the other hurricanes that have hit Puerto Rico since.

Worse before getting better

Prior to the Sept. 11 disaster caused by the terrorists, the U.S. economy was already in dire straits, and no forecaster in the country could predict when the economy would pick up. At the start of 2001, many thought the economy would start to improve by the middle of the year. It didn’t happen. Later it became the third quarter, then the fourth quarter.

Actually, it was anybody’s guess, and many analysts even felt there would be no marked recovery until 2003. All of those predictions are now out the window.

During the next few months, the U.S. economy might very well get worse than it is today. But just as the dust clouds over Ground Zero in Manhattan have cleared, it has become quite clear to us that the stateside economy will start improving around January 2002, and the Puerto Rico economy will follow suit within a month or two.

The coming V-recovery

CARIBBEAN BUSINESS believes the economic rebound will be graphed, not in the traditional U-shape, but in a V-shape—going straight up—during the first quarter of 2002. The reasons are right in front of us.

For starters, the Federal Reserve Board has flooded the U.S. banking system, including Puerto Rico, with so much liquidity that our banking system is in very good shape.

In fact, the Fed continues to cut interest rates and will do so until the economy responds. Interest rate cuts usually take from six to eight months to filter through and have any effect on the economy. That positive effect would have begun by the third or fourth quarter of this year, but will now be delayed further.

It won’t be much longer, however.

A boom in federal spending

In addition to the Fed, other federal agencies will be stimulating the economy.

The United States is fighting two wars for the first time in a long history: an offensive war outside its borders and a defensive war within. This is not a war against any one country, even though the Taliban in Afghanistan will probably take the biggest brunt of the American retaliation.

It is a war against terror networks with terrorists in as many as 60 countries. They will be hunted down by the U.S., Great Britain, Israel and tens of other countries in what may become the largest coalition of countries the world has ever seen.

This will be an open and massive counter-terrorism war all over the world, completely different from any other war fought by any major global power or alliance during the 20th century, but a war nonetheless.

And a very expensive war.

CARIBBEAN BUSINESS estimates that, starting immediately, the U.S. government and the private sector will spend $10 billion per month through the end of 2002, or at least $150 billion between now and then. This is money the U.S. was not going to spend, and it comes on top of the regular expenditures in which the federal government and private sector would have incurred during that period.

This massive injection will build up the armed forces (Navy, Army, Marines and Air Force), Coast Guard, National Guard, Central Intelligence Agency (CIA), National Security Agency (NSA), Federal Bureau of Investigations (FBI), Immigration and Naturalization Service (INS), U.S. Marshals, and many other federal agencies at different levels.

Fortunately, the federal government has the money to spend. While the economic slowdown has dwindled the budget surplus, enough of that surplus remains to fund what is now the country’s No. 1 priority: the war on terrorism.

Private-sector investment

For its part, the private sector will engage in giant investments in its own security around the country, as well as in purchasing replacements of merchandise and systems lost on Sept. 11th.

The amount of devastation in New York alone, where other buildings were toppled in addition to the twin towers and several others are unusable pending repairs--if they can be repaired at all--has meant that hundreds of thousands of computers, printers, fax machines, cellulars, beepers, chairs, tables, carpeting, you name it, will have to be replaced by companies, and quickly. The same applies at the Pentagon in Washington.

Following last December’s precipitous fall off in the U.S. economy, the country’s manufacturers curtailed production and laid off thousands of workers. The unexpected depth of the slow-down caught them with high inventory levels.

But inventory levels across the country have now been whittled down. Thousands of companies will have to rehire and in many cases, operate several shifts, seven days a week, to keep up with the demand of all the new things that will be needed by consumers and businesses, not to mention the military and the federal government.

Money will be flowing like water. Imagine what the impact on the U.S. economy will be when approximately $10 billion is spent per month between now and December 2002.

Homeland security

The new homeland security battle alone will lead to massive federal and private spending in every region of the country, including Puerto Rico.

Terrorists were able to shut down the country for a few days, something that had never happened before to the U.S., at least not quite this way. Other than the revolutionary war of the mid-1770s and the Civil War of the early-1860s, the U.S. has always fought its wars on foreign soil. The only other single attack on American soil was Pearl Harbor, which set off our participation in World War II. But even then, neither the Japanese nor the Germans were able to get to the U.S. mainland soil after that initial strike, and no significant measures were taken then to protect the American people right here at home.

That is the huge difference this time around. President George W. Bush has even created a brand new cabinet level department exclusively for that purpose, the Homeland Security Agency headed by Pennsylvania Governor Tom Ridge, a Marine Corps Vietnam veteran, who will resign Oct. 5th to take up his new post.

Fortress America is coming. With the risk of terrorist retaliation high, thousands of federal office buildings across the country, including Puerto Rico, will be under heavy guard and will undergo investment in security reinforcement. Likewise at the nation’s airports, including federal law enforcement personnel much better trained and much better paid than the regular, minimum wage or temporary workers generally used today.

Electrical grids, water supplies, financial markets, the banking system, computer and telecom networks, even major sporting and entertainment events—in sum, all of America is vulnerable while the offensive of the war on terrorists is being carried out for the next few years. The massive homeland security investment will touch nearly every segment of the U.S. economy.

The U.S. Congress has stopped bickering for now, and members of Congress are in the mood to approve piles of homeland security money for all levels of the government: federal, state, and local.

Confidence across America

Another very important factor to help upturn an economy is confidence in its leadership. As President Ronald Reagan did when he took over an economy in shambles from President Jimmy Carter, today President Bush is doing a tremendous job of showing he can be a leader and bring confidence to the American people.

And not just to the American people. With American pride, power, and prestige on the line worldwide, Bush is likely to succeed in his effort to rally the world and persuade everyone that we can win this war. That will boost consumer and business confidence, an indispensable requisite in lifting an economy.

Even the U.S. stock market, which has seen a big downturn this year and particularly since the bombing, will pick up in a few months. When the 1993-2000 bull market began, there was about $500 billion on the sidelines, waiting to be invested. It certainly was invested and created a booming market. Today, there’s more than $2 trillion in cash sitting on the sidelines, waiting for the first sign of an economic recovery.

There can be no doubt that once there are definite signs of this stateside recovery, a lot of that money will start pouring into the stock market.

Government spending spree in Puerto Rico, as well

Meanwhile in Puerto Rico, the economy will probably take a couple of extra months to turn around, as it usually does after a pickup in the U.S. mainland economy, but we expect it to happen by about March 2002.

Judging from recent statements and actions, the Sila Calderon administration is determined to get the island’s economy strong again as fast as possible, with the unanimous cooperation of the business community.

The governor seems to be approaching this situation as if it were an election year, with the intent of pumping loads of money into the economy. Dollars will flow in construction and other government expenditures. Private sector construction will also pick up as the government removes obstacles and eases the permit process.

Consumers can be expected to catch on soon and resume normal spending patterns. This will inevitably lead to a pick-up of the Puerto Rican economy that should put economic activity at or near the level where it was in 2000.

While we may think the local government doesn’t have enough funds to create this kind of an upturn, it doesn’t need to have the funds on hand. With the island’s excellent credit, it will very easily raise all the money it needs from the financial markets, where institutional and individual investors are looking for places to put some of the money that is weighing them down right now. And nowhere better than in a creditworthy jurisdiction within the U.S., like Puerto Rico. Plans are already under way to raise at least $800 million at the earliest for this economic boost.

Tourism will recover

Direct government expenditures will not be the only source of the upturn in Puerto Rico’s economy that will be evident during the coming months.

Americans will start to travel again once the cold weather hits the north, which will coincide with the passing of the initial shock and fear following the Sept. 11th attacks.

People will need relaxation, some stress-busting vacations. The great majority of Americans are certainly not going to travel overseas to Europe, Asia, and South America. They will want to stay under the U.S. flag, where they can count on the Coast Guard, Customs, the military, FBI, federal marshals and all other federal government agencies watching over them, as these agencies will be doing in the homeland security process.

As part of the U.S., Puerto Rico figures to be one of the preferred secure, warm-weather destinations. It is well known in the States. It is only a few hours away, and travelers will feel safe here. If Puerto Rico takes advantage of this without delay--by launching an intelligent campaign that does not make it so obvious--yet effectively gets the message across, Puerto Rico’s tourism industry could find itself doing very well in just a few months. The campaign’s subtle message: this is Puerto Rico U.S.A., with the same protections as anywhere else in America.

Manufacturing will rev up again

Manufacturing will also be revived during the first quarter of 2002 for a very simple reason. As the economy in the States improves and businesses, the federal government and consumers start buying again, many of the manufacturing plants in Puerto Rico will be among the factories that will be producing these goods, whether those plants are locally owned, U.S. headquartered, or foreign owned.

Moreover, as the Bush administration prepares to disarm terrorist cells around the world, it is only natural that American companies expand their operations with the U.S. And what better place than Puerto Rico? The challenge for the Puerto Rico Industrial Development Co. (Pridco) is the same as for the Tourism Co.: it must promote these U.S. expansions discretely.

On the verge

We certainly wish this barbaric attack on the U.S. had not happened, but the fact is that every major disaster, natural or man-made, is followed by phenomenal opportunities.

Today is such a time.

We are on the verge of a fast economic upturn that should take us back to or near the level of growth we enjoyed during the previous eight years up to November 2000.

The economic fundamentals are in place for a fast turnaround of the U.S. and Puerto Rico economies. The war on terrorism will ignite this next economic boom by the first quarter of 2002 at the latest.

This Caribbean Business article appears courtesy of Casiano Communications.
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