Markets should be worried over North Korea threat
The line dividing North and South Korea was drawn by two young colonels in the middle of the night on August 11 1945. They were thrust into a room, given a map, and told to come up with a solution within half an hour. The Koreans were not consulted, and nor were the British or the Chinese. US military planners were focused solely on the surrender of Japan and the rush to pre-empt the Soviet Red Army coming down from the North.
One of the colonels happened to be Dean Rusk, a Rhodes Scholar who would become US secretary of state in the 1960s. He drew the line through the 38th Parallel because it “would place the capital city in the American zone”.
The new frontier was arbitrary, like placing a trench of landmines through the middle of Oxfordshire. There is no ethnic difference between the North and South.
As one US official put it: “Korea is the place where you see diplomacy in the raw, diplomacy without gloves, perfume or phrases.”
Rusk feared that Seoul was indefensible, and he was right: the city was overrun within days when the North attacked in the Korean War. His fateful line is why so much of this great metropolitan area of 24million people is today within artillery and rocket range, regularly threatened with a “sea of fire” by the Communist Kim dynasty.
When William Perry, the US defence secretary, asked whether it was possible to carry out a surgical strike on the North in the 1990s, the Pentagon told him that it might leave hundreds of thousands dead.
Today Kim Jong-un has an estimated 8,000 rocket launchers and artillery pieces on the border. A study by the Nautilus Institute said 30,000 civilians might be killed in the first barrage.
I have a personal stake: my granddaughter is a Korean citizen, and spends part of her time under howitzer barrels below the 38th Parallel.
Just when we thought the markets were becalmed, with equity volatility at 90-year lows, the “August Curse” threatens to strike again. It was the credit “heart-attack” on Wall Street exactly 10 years ago that kicked off what was to become the global financial crisis, and it was Russia’s default in August 1998 that caused the East Asian financial crisis to metastasise.
This has more in common with August 1914 when the long-simmering tensions between the status quo powers and a rising Germany erupted – in remote territory – into a battle for world domination.
It embroils us all because it is the first super-charged test of whether US and China can manage their “G2” global condominium. If markets are jittery as President Donald Trump threatens to unleash “fire and fury like the world has never seen” on Pyongyang, they should be.
Any misjudgement could shatter the globalised financial and economic system that underpins asset prices. Valuations are stretched to extreme levels on the premise that the international order is in safe hands. Quite obviously it is not.
Today, the Shiller price-to-earnings ratio of the S&P 500 index is around 30. This is the highest in 150 years of usable data, excluding the two anomalies of 1929 and the dotcom bubble.
Bulls argue that this is sustainable because globalisation generates surplus capital, and generates redblooded economic growth rates of 4pc or so. Well exactly, and what happens if “Chimerica” suddenly goes off the rails? Chinese leader Xi Jinping patiently tried to explain the complexities of North Korea to the US president at their meeting in Florida. “After listening for 10 minutes, I realised it’s not so easy,” said Trump with disarming candour. That is a start, at least.
But how much does this prickly, petulant man know about the Korean War – that forgotten “meatgrinder of American manhood” – when the US fatally misjudged Mao Tse-tung’s red lines, invaded the North, and blundered into a full-blown conflict with China?
Does he know how close General Douglas Macarthur came to acting on his plan to rain 38 cobalt-h bombs over northern China, rendering it uninhabitable?
His atom bombs were never dropped. But as Bruce Cummings writes in his poignant history, Korea’s Place in the Sun, Macarthur did create a zone of devastation near the Yalu River, flattening “every factory, city, and village” across a thousand square miles.
He blew up the irrigation dams that watered 75pc of the North’s food production. He reduced Pyongyang to rubble with incendiary bombs. Every city in the North was levelled. Each looked like another Hiroshima. Does Donald Trump know this when he talks of “fire and fury”?
Trump’s wild threats are grist to the mill of Kim Jong-un. The hermit regime thrives on such bluster. It plays to the North’s siege mythology and justifies emergency sacrifice.
Prof John Kelly from Pusan University said North Korea’s purpose in acquiring nuclear weapons is essentially defensive.
The bankrupt regime craves a deterrent to avoid the fate of Saddam Hussein and Muammar Gaddafi. “They aren’t stupid,” he said.
But if hot rhetoric makes sense for Kim Jong-un, it is another matter coming from the White House. The danger is that this shouting match sets off a spiral that provokes Trump into overreacting.
If the Trump doctrine is that US red lines must be enforced, he has manoeuvred himself into a credibility trap. The tripwire is set low. He vowed to unleash carnage even if North Korea merely “threatens” the US.
The military consensus is that the US cannot destroy Kim’s nuclear capability with a first strike and that any such attack risks a retaliatory holocaust in the peninsular.
The crisis can therefore be treated only as a containment question, working with the grain of South Korean and Chinese leadership in diplomatic concert.
It goes without saying that almost the entire world agrees that Kim Jong-un must not be allowed to miniaturise nuclear warheads or master the “re-entry” phase in a missile attack. All share this objective. What they have zero confidence in is the judgment and temperament of Trump.
At the end of the day, North Korea remains a Chinese client state. The conciliatory signals from Beijing have been complex and ambivalent. They can be misread.
If Trump is reckless enough to launch his devastation in a unilateral strike against a chorus of informed warnings, he will bring about the moral collapse of American leadership and set off a pan-asian arms race. The latent superpower conflict between the US and China will become a real one.
The US Congress can exercise only so much restraint. As Richard Nixon, the former president, famously said in the Oval Office tapes: “The President of the United States can bomb anybody he likes.” If only we had Nixon now.
‘Just when we thought the markets were becalmed, the August curse threatens to strike again’