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How a war would impact investments

- Alan Lavine and Gail Liberman

What can we expect if we go to war with Iraq?

Experts say the price of oil could rise, creating higher inflation and higher interest rates. Bond prices should fall. Bond prices move in opposite directions to interest rates. So if rates rise, bond prices fall.

Money market funds should pay higher short-term yields as rates rise. Money funds track short-term interest rates and keep their share value at $1.

On the stock side, expect companies in the oil and the defense industry to do well.

If inflation gets out of hand, gold should continue to perform well. Paul Kasriel, director of economic research at Northern Trust, Chicago, says oil prices have already risen in anticipation of the war.

If the military victory for the United States comes quickly without interruption to the oil supplies from the Persian gulf, oil prices might fall sharply soon after. If not, there could be rising interest rates, high inflation and a recession.

Thomas Marthaler, senior managing director of ABN AMRO Asset Management, agrees that oil prices could rise, but he believes the war will be over quickly.

Contrary to others, Marthaler believes that interest rates could decline initially because money will move into Treasury securities for safety. That could drive up bond prices.

Some economists are concerned that the war could last longer than expected, driving up the price of oil and cutting economic growth by 1 percent or more.

Bruce Steinberg, Merrill Lynch chief economist, says that if we have a war, the price of oil could rise to $40 a barrel. But the price increase would not be enough to push the economy back into a recession.

Grant Aldonas, under secretary of the U.S. Department of Commerce, said at a recent press conference that a war with Iraq is not inevitable. The impact on the world economy would depend on how long the war lasts.

On the positive side, he said, the war could actually help the global economy. It may eliminate the threat of terrorism, and result in fresh supplies of oil being released in the worldwide market.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

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