"Under Any Analysis, It’s Insanity": What War With North Korea Could Look Like

Now that the possibility of a war between the US and North Korea seems just one harshly worded tweet away, and the window of opportunity for a diplomatic solution, as well as for the US stopping Kim Jong-Un from obtaining a nuclear-armed ICBM closing fast, analysts have started to analyze President Trump’s military options, what a war between the US and North Korea would look like, and what the global economic consequences would be. Needless to say, this is a challenging exercise due to the countless possible scenario, event permutations and outcomes, not least because China and Russia may also be sucked in, leading to a true world war.

Realistically, war has to be avoided,” said John Delury, an assistant professor of international studies at Yonsei University in South Korea. “When you run any analysis, it’s insanity.”

Insanity or not, as Capital Economics writes in a May 17 note, while the most important impact of a full-scale conflict on the Korean peninsula "would be a massive loss of life" but added that there would also be significant economic consequences. While we focus on the latter below, first here are some big picture observations courtesy of Bloomberg, including an analysis of whether all out war can be avoided:

  • Can’t the U.S. try a surgical strike?

It probably wouldn’t work well enough. North Korea’s missiles and nuclear facilities are dispersed and hidden throughout the country’s mountainous terrain. Failing to hit them all would leave some 10 million people in Seoul, 38 million people in the Tokyo vicinity and tens of thousands of U.S. military personnel in northeast Asia vulnerable to missile attacks -- with either conventional or nuclear warheads. Even if the U.S. managed to wipe out everything, Seoul would still be vulnerable to attacks from North Korea’s artillery.

  • Why might Kim go nuclear?

“Even a limited strike” by the U.S. “would run the risk of being understood by the North Koreans to be the beginning of a much larger strike, and they might choose to use their nuclear weapons,” said Jeffrey Lewis, director of the East Asia nonproliferation program at the Middlebury Institute of International Studies. Somehow, the U.S. would need to signal to both North Korea and China -- Pyongyang’s main ally and trading partner -- that a surgical military strike is limited, and that they should avoid nuclear retaliation.

  • Is regime change an option?

New leadership wouldn’t necessarily lead to a new way of thinking among North Korea’s leadership. Kim’s prolonged exposure to Western values while at school in Switzerland led some to speculate that he might opt to open his country to the world -- until he took power and proved them wrong. Moreover, if Kim somehow were targeted for removal, the ruling clique surrounding him would have to go as well -- making for a very long kill list. China, fearing both a refugee crisis and U.S. troops on its border, would likely seek to prop up the existing regime.

  • Does that mean all-out war is the best U.S. option?

A full-scale invasion would be necessary to quickly take out North Korea’s artillery as well as its missile and nuclear programs. Yet any sign of an imminent strike -- such as a buildup of U.S. firepower, mobilization of South Korean and Japanese militaries and the evacuation of American citizens in the region -- could prompt North Korea to strike preemptively. China and Russia may also be sucked in. “Realistically, war has to be avoided,” said John Delury, an assistant professor of international studies at Yonsei University in South Korea. “When you run any cost-benefit analysis, it’s insanity.”

  • How might North Korea retaliate?

The most immediate reaction would likely be massive artillery fire on Seoul and its surroundings. North Korean artillery installations along the border can be activated faster than air or naval assets and larger ballistic missiles that can target South Korean, Japanese or American bases in the region with nuclear, chemical and biological weapons. Those countries have ballistic-missile-defense systems in place but can’t guarantee they will shoot down everything. Japan has begun offering advice to its citizens on what to do in the event a missile lands near them -- essentially try to get under ground -- and U.S. firms are marketing missile shelters. While it’s unclear if North Korea can successfully target U.S. cities like Denver and Chicago with a nuclear ICBM, it’s similarly unknown if U.S. defense systems can strike it down -- adding to American anxieties.

  • What options remain on the table?

Many analysts say it’s time to start talks to prevent the situation from worsening. Stopping North Korea from obtaining a thermonuclear weapon, or more advanced solid-fuel missiles, is a goal worth pursuing, according to Lewis. However unpalatable it may seem, that means offering rewards to entice North Korea back to the negotiating table. Lewis suggested one reward could be to scale back U.S.-led military drills around North Korea. The question of what can be offered to the North Koreans “is a conversation that should be happening both with the public, with Congress and with the North Koreans, instead of having this imaginary conversation about war scenarios,” said Delury. “The realistic option is a diplomatic one that slows this thing down. And that’s going to require a lot of talks.

* * *

Assuming appeasement and containment are off the table, and a diplomatic solution fails, what would the impact on the regional and global economy be from a worst case scenario - one in which conventional war breaks out? Here are the salient thoughts from Capital Economics on this increasingly sensitive topic:

  • North Korea’s conventional forces, which include 700,000 men under arms and tens of thousands of artillery pieces, would be able to cause immense damage to the South Korean economy. If the North was able to set off a nuclear bomb in South Korea, the consequences would be even greater. Many of the main targets in South Korea are located close to the border with the North. The capital, Seoul, which accounts for roughly a fifth of the country’s population and economy, is located just 35 miles from the North Korean border, and would be a prime target.
  • The experience of past military conflicts shows how big an impact wars can have on the economy. The war in Syria has led to a 60% fall in the country’s GDP. The most devastating military conflict since World War Two, however, has been the Korean War (1950-53), which led to 1.2m South Korean deaths, and saw the value of its GDP fall by over 80%.
  • South Korea accounts for around 2% of global economic output. A 50% fall in South Korean GDP would directly knock 1% off global GDP. But there would also be indirect effects to consider. The main one is the disruption it would cause to global supply chains, which have been made more vulnerable by the introduction of just-in-time delivery systems. Months after the Thai floods had receded in 2011 electronics and automotive factories across the world were still reporting shortages.
  • The impact of a war in Korea would be much bigger. South Korea exports three times as many intermediate products as Thailand. In particular, South Korea is the biggest producer of liquid crystal displays in the world (40% of the global total) and the second biggest of semiconductors (17% market share). It is also a key automotive manufacturer and home to the world’s three biggest shipbuilders. If South Korean production was badly damaged by a war there would be shortages across the world. The disruption would last for some time – it takes around two years to build a semi-conductor factory from scratch.
  • The impact of the war on the US economy would likely be significant. At its peak in 1952, the US government was spending the equivalent of 4.2% of its GDP fighting the Korean War. The total cost of the second Gulf War (2003) and its aftermath has been estimated at US$1trn (5% of one year’s US GDP). A prolonged war in Korea would significantly push up US federal debt, which at 75% of GDP is already uncomfortably high.
  • Reconstruction after the war would be costly. Infrastructure, including electricity, water, buildings, roads and ports, would need to be rebuilt. Massive spare capacity in China’s steel, aluminium and cement industries mean reconstruction would unlikely be inflationary, and should instead provide a boost to global demand. The US, a key ally of South Korea, would likely shoulder a large share of the costs. The US spent around US$170bn on reconstruction after the most recent wars in Afghanistan and Iraq. South Korea’s economy is roughly 30 times larger than these two economies combined. If the US were to spend proportionally the same amount on reconstruction in Korea as it did in Iraq and Afghanistan, it would add another 30% of GDP to its national debt.

* * *

Finally, a look at the market impact, with the immediate attention falling on South Korea. It has been the market's persistent refusal to even contemplate a worst-case scenario that perplexed Goldman, as we discussed this morning. In a note from the bank's chief credit strategist, Charles Himmelberg said that "our sense is that investors have grown comfortable with the view that geopolitical tensions invariably result in diplomatic talks, in which case the right trade is to buy any dips. The result is a market psychology that is relatively resistant to the pricing of geopolitical risk."

As Capital Economic follows up in a daily note this morning, despite the trading of combative statements over the past two days between the US and North Korea, "movements so far have not been very large, and we suspect that this will remain the case so long as military conflict is avoided."

Not surprisingly, South Korea’s stock market has been amongst the worst affected, with the country’s Kospi index falling by just over 1%. The won has also weakened by a similar amount against the dollar. But in context, these moves are small. South Korea’s stock market is still about 17% higher than it was at the start of the year, so investors are hardly panicking. And the won is merely back to its level of four weeks ago. (See Chart 1.)

The good news for market bulls is that even if tensions escalate further from here, CapEcon thinks that the implications for equities in South Korea and elsewhere "will remain limited", assuming of course that war does not actually break out. As proof, the advisory boutique shows the example of the 1962 Cuban missile crisis, when the world came closest to outright conflict between two nuclear-armed powers, and its impact on the S&P.

Although the S&P 500 fell after US President Kennedy announced the discovery of missiles on Cuba, it had more or less recovered its losses before Soviet General Secretary Khrushchev announced six days later that the missiles would be removed from the island. (See Chart 2.) And even the initial fall was very small compared to the declines in US equities earlier that year, which were not connected to the crisis.

One notable difference from 1962 is that back then the world's central banks were not "all in" in the effort to keep equity markets stable, so one can argue that it would take an even greater "shock" to the system to have an adverse and lasting impact on stocks. In fact, stocks may even forego the initial dip and proceed straight to the inevitable rally which central banks will do everything in their power to unleash, even if it means making the current bubble which now has virtually every asset manager worried, even greater.

And then there is the worst case scenario in which war does break, and where not even central banks can deflect the avalanche of selling. What asset should be owned in that scenario? According to CapEcon, the best answer (our earlier discussion about ethereum notwithstanding) may be gold:

The price of gold edged higher on Wednesday, to about $1,267 per ounce, following President Trump’s comments that the US was ready to hit North Korea with “fire and fury”. The Japanese yen, another safe-haven asset, also rose on the news. That said, the moves have been small. This is perhaps due to the fact that markets are pricing in a very low probability that the situation will actually escalate to a full-scale war. However, there remains huge uncertainty as to how the crisis will play out and this may benefit gold prices over the coming weeks. Indeed, increased geopolitical risk might even see the price rise beyond $1,350 per ounce, which hasn’t been breached since the Brexit referendum last year.


Eyes Opened Cognitive Dissonance Thu, 08/10/2017 - 05:21 Permalink

This rational & logical analysis of the "matter" has no place in US foreign policy... which is dictated by the " USA !! USA !! USA !!" line of reasoning.. Stepping away is not in the nature of the US military/political mindset... tho Syria may have made them think twice.. NK is like a cornered injured animal, it WILL fight, especially given how Amerika has treated them historically... Trump has the luxury of simply pulling back. A question for all...Would YOU trust Amerika to do the right thing ?? History says NO !!

In reply to by Cognitive Dissonance

grizfish BLOTTO Wed, 08/09/2017 - 16:39 Permalink

Apparently the citizens of North America have not been told that the US military invaded North Korea in the 1950s.  We dropped more bombs on them than there are people in NK.  Those feisty demons keep coming back for more.  What will it take to give control of that country to the banksters? 

In reply to by BLOTTO

NiggaPleeze AGuy Wed, 08/09/2017 - 18:22 Permalink

since NK never signed off the armistice

Now there's a load of disinfo.  Armistice was signed by US, China, NK and SK.  It is true that in 2013, 60 years later, N. Korea delcared the armistice "dead", but that was due to US sanctions and just concluding the US was not abiding by its terms, N. Korea did not say it was withdrawing.  IUndeed, if in the middle of a war a temporary truce (armistice) is revoked, war is resumed, it doesn't make sense to revoke the truce and sit idly doing nothing, as obviously in that case the truce is still in effect.

In reply to by AGuy

PT NiggaPleeze Wed, 08/09/2017 - 22:26 Permalink

You revoke the truce when the other side breaks its terms just to let everyone know what the opposition did while it is fresh in everyone's head.  You strike back when you feel like it, when you are ready.  No point saying, "I'm gonna strike back becoz the opposition dishonoured the agreement 25 years ago.""You broke the deal, there is no truce."  But if the other troops have already gone home then there is no point bringing the fight to their back door, unless you have nothing better to do with your time.Then again, if you declare a truce is dead then I supposed you'd better be ready to defend yourself immediately.  Or at least make sure the rest of the world knows your side of the story ("What truce?  They're already attacking me right now!")

In reply to by NiggaPleeze

Zip_the_Zap TheLastTrump (not verified) Wed, 08/09/2017 - 18:22 Permalink

So what is it about? White people telling the inferior yellow skins in Asia they are not allowed nukes. Only the agelo-zionists are allowed to possess weapons that guaranteen their soverenty. Oh, that is right, the USA is the global white knight in shining armor who is above approach, acts without self-interest and is only concerned that the global communitee lives in peace and harmony.

In reply to by TheLastTrump (not verified)

MojoHoHo TheLastTrump (not verified) Wed, 08/09/2017 - 18:08 Permalink

Hate to see people who still don’t understand what’s happening in the world today. First discover what backed the US dollar after Nixon took it off gold. Answer (The Petrodollar) The word dollar means US dollar. The one that enables us to keep spending more money than anyone else and never pay it back. (over a million in liabilities per taxpayer now) Then look at the match between those countries who are no longer using the US Petrodollar, and those countries cable news has been instructed to portray as bad people or monsters. Only after you do that might you agree that a Federal Reserve owned Central Bank needs to maintain world reserve currency by keeping the world on the petrodollar. Otherwise someone else would have the authority to disallow us to keep writing bouncy checks for road projects, welfare checks and aircraft carriers and want us to start paying our debts.

In reply to by TheLastTrump (not verified)

TheLastTrump (not verified) Stackers Wed, 08/09/2017 - 16:17 Permalink

LOL you're so full of shit.....they don't have any sub launced missiles yet because none of their tests has been successful. Pro tip, their subs can't reach the USA either. Now, a SCUD on a freighter with a nuke attached, that could do Los Angeles, Port of Long Beach, Seattle, etc. Or an EMP strike over the midwest. But do they REALLY have the ability to put a nuke on a missile yet? Or guide it accurately, if they do? I don't think so.

In reply to by Stackers

Winston Churchill TheLastTrump (not verified) Wed, 08/09/2017 - 16:45 Permalink

We don;t know shit.Seems the norks have actuall had nukes since the early 2000.s a fact I only learned of today.They've worked closely with Pakistan on both warhead minuturization and missile delivery systems.Not Iran.Far rom overstating their capabilities, the US is grossly underestimating them.North Korean volunteers were crucial to Mao winning his revolution/Their ties with the PLA run deep and long becauseof that..The US is blind with no HUMINT.Stick that big dick in that hornets nest at your own risk of having it chopped off.

In reply to by TheLastTrump (not verified)

AGuy TheLastTrump (not verified) Wed, 08/09/2017 - 16:52 Permalink

"OL you're so full of shit.....they don't have any sub launced missiles yet because none of their tests has been successful."

Old news. They had a successful test last month:


Really this doesn't matter, They have plenty of Medium range missiles that can hit South Korea & Japan. Even one sucessful nuke strike is going to be devastating for the global economy. I am sure that if the US pushes NK buttons, and nukes fly every major power is going to be pissed at the US. which will result in sanuations on the US and end of the US Dollar Hegemony.

We don't need anymore wars!

In reply to by TheLastTrump (not verified)

Walking Turtle TheLastTrump (not verified) Wed, 08/09/2017 - 17:01 Permalink

Ah, but what are NK's relations with IzraHell, these days, may we please be allowed to know? Don't hear much about that relationship, hmmm...  THAT Rogue Nation has apparently developed some highly atypical nuclear weapons-delivery capabilities of late.  Saw a fine video demo, a couple weeks back.  On freighters.  Looking innocent.  Ping the Harbormaster per SOP and sail right in!  Who SAYS a Military is needed to deliver a nuke, hm?  Freighters are loaded in Haifa every day... And the US Congress is (longtime now) 98% Izzy-pwn'd anyway.  So nobody THERE'd bother to object, now would they, hm?Only thing Yours Truly knows is that the Israelis do BIG BUSINESS CONTRACTS.  One of which (semi-quietly) brought Fukushima down.  VERY clever delivery system, THAT one.  Magna BSP made a FINE Trojan Horse of a "Security Camera" nuke for THAT little job, ayup.  ("ICBMs, Bibi?  Who NEEDS them?") There's reportedly a Swedish nuclear power generation plant still under similar threat to this day, fwiw. And as to the American urban centers...?  Well a Big Nuke's a fine core component of an Urban Moving System, now ain't she just?Nuclear Blackmail?  Delivery contracts?  With Just Who-ever?  Why WOULDN'T they?  And WHY on Earth would THEY ever tell US? Just looking at What Is Not Mentioned.  Google "Perspectives" AI CensorBot rating of this comment is 10%, btw & fwiw.  And that is all.  0{:-/o[

In reply to by TheLastTrump (not verified)

JohninMK TheLastTrump (not verified) Wed, 08/09/2017 - 17:49 Permalink

They certainly have the ability to target shorter range missiles pretty accurately. When the target is say LA 10 yard accuracy is not really needed!Many of those missiles are on mobile launchers so could quite easily be on a merchant ship. Or the warhead is already parked 'safely' in an anonymous container in a lot somewhere.

In reply to by TheLastTrump (not verified)

GoingBig TheLastTrump (not verified) Wed, 08/09/2017 - 17:58 Permalink

This is so stupid its insanity. People not knowing anything spouting shit they know nothing about. NK doesn't have any sub launched anything. They would be lucky not to sink their diesel electric if they tried to. Any attack on NK would be devastating to SK. There are just too many weapons pointed their way.  Why is it that China sounds like the only Adults around? Trump and Kim are equally stupid and boisterous. If Trump tries anything hundreds of thousands of SK will pay a dear price. He speaks without thinking. In fact it doesn't appear that he thinks at all.I really don't get those that still support him. They obviously are ideologues and not thinking people.

In reply to by TheLastTrump (not verified)

NiggaPleeze TheLastTrump (not verified) Wed, 08/09/2017 - 18:32 Permalink

LOL, N. Korea has an operational submarine-launched ballistic missile called the Pukkuksong-1 or Bukgeukseong-1.  But the post you were responding to does not require a ballistic missile (i.e., one that goes into orbit).  The border cities - Seattle, San Francisco, LA, San Diego, New York, Miami, even Baltimore/DC - can be struck by cruise missiles, guided missiles and in many cases even torpedoes.On top of that, unlike the cavemen Taliban, these submarines can attack Guam as well as US aircraft carriers.The Iraq threat was definitely overplayed, but N. Korea is no paper tiger.

In reply to by TheLastTrump (not verified)

WeekendAtBernankes Koba the Dread Wed, 08/09/2017 - 22:24 Permalink

MAD really doesn't apply to the NK situation. That said, MAD is not insane: If one party believes total nuclear war is inevitable and that the other party can not or will not launch a second strike, their optimal strategy to launch a first strike and take them out. Promising any first strike will be met with an effective second strike, ensuring total destruction of the aggressor, is the only credible deterrent to such a first strike.Total insanity in the nuclear age would be leading someone to believe that it may be in their best interest to murder you and 200 million of your countrymen because you were ambiguous about the consequences of a first strike. 

In reply to by Koba the Dread