North Korea: A Slow-Motion Crisis?

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 27, 2017, 2:44:16 PM

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North KoreaYesterday, I spoke with an advisor who told me that a potential confrontation between the U.S. and North Korea is creating a lot of fear among his clients. In fact, one client wants to sell everything and go to cash due to concerns over what might happen. I certainly understand this, particularly in light of the rising level of rhetoric from both sides. That being said, I don’t think we need to be as worried as all that.

While there are real concerns, there are also reasons not to worry in the near term. Let’s take a look at why all parties involved want to avoid military action, what preparations for such action would look like, and where we are right now. This will give us some context on whether to worry now (which is no) and when we might want to start worrying. Then, at the very least, we will be able to worry efficiently.

No one wants military action

North Korea does not want military action because its regime could not survive a concerted U.S. attack. Its regime would do quite a bit of damage on the way down but would ultimately lose. It’s as simple as that. This view is supported by the fact that North Korea has pushed crises over the years but has never quite gone far enough to warrant U.S. action. I suspect that is North Korea's plan now, which means an actual war is not likely.

South Korea wants to avoid military action because North Korea can decimate its capital city, Seoul, with artillery it has had in place for decades. No responsible government wants a war on its own territory. Recently, there has been some revision over how much damage the North Koreans can do, dropping the potential casualties from hundreds of thousands to tens of thousands. But the number doesn’t really matter. Seoul will not approve of anything that will result in so many deaths of its own citizens and will bend over backwards to avoid any conflict.

The U.S., although less directly affected, does not really want a war. We have a substantial military and civilian population in South Korea that would be at risk from North Korean artillery if the U.S. attacked. On a geopolitical note, the U.S. alliance structure would certainly be shaken if we attacked without South Korean approval, which is not likely. Indeed, that action could turn South Korea from an ally into a neutral state (at best) or into an enemy (more likely).

Further, as one of the linchpins of the U.S. presence in Asia and a major economy, military conflict would rattle U.S. strategy and make us substantially less safe in the future. The negative consequences for the U.S. would be both immediate and long term, and there is very little upside beyond possibly stopping the North’s nuclear program. Since there are potentially other, more preferable ways to do that, military action is definitely a last resort.

China is the fourth player, and its motives are more mixed. China certainly would not mind the U.S.–South Korea alliance breaking or the fall of the North Korean regime, but it also does not want to deal with the consequences of a war or a regime collapse. In the medium to long term, the Chinese might benefit from a U.S. attack in a geopolitical sense, but the short-term costs would be enormous. On balance, China is probably happier with the status quo.

Given all of this, the likely outcome is that the North Korea problem once again moves from a crisis to a chronic concern, much as it has been for decades. This is what markets seem to be betting on, and what the man on the street in South Korea seems to be expecting. As a base case, it makes a lot of sense.

When should we start worrying?

As much sense as this outcome makes, however, the U.S. also has potentially overriding reasons to attack. Either or both sides might miscalculate, sending us into war more or less by mistake. If that happens, war will not be immediate. Instead, we will see warning signs that might look something like the following.

U.S. positioning attack forces around the Korean peninsula. Right now, we simply do not have the forces in place to make a massive attack, which is the only kind that makes sense. Putting those forces in place will take days, if not weeks, and will be visible during that time. Until we see signs of this, an attack is not really possible.

U.S. evacuating and preparing its Korean forces. For the forces we have in place, some preparation will be essential. Again, this will be visible to everyone and is not yet happening.

China moving forces to clean up the mess. While China would not participate in a strike, it would have to deal with the aftermath, particularly along the border with North Korea. If China felt a conflict was likely, it would also move forces toward the border. This is not yet happening.

South Korea public opinion would change. It would be almost impossible for the U.S. to prepare an attack, with or without South Korean assistance, without the South Korean public becoming aware of it and—justifiably—reacting. Right now, this does not seem to be happening.

Keep calm and carry on

Modern warfare typically requires extensive buildup of forces and immense logistical backing, especially at the strategic level. Of course, surprise attacks may work at lower levels. But a combined arms campaign, at a significant distance from the U.S., would require substantial preparation that is simply not happening, at least yet.

Because of all of these factors, while there is always the possibility of war, the need to worry about the immediate future is not that great. To advisors and their clients, I certainly share your concerns and will be watching this situation carefully. But this will be a slow-motion crisis, which is more likely to devolve back into something chronic.

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