Prospects for the U.S. economy look increasingly uncertain, and not only for cyclical reasons. Although third-quarter GDP increased at an annual rate of over 3 percent, posting four straight quarters of expansion, there are signs that consumers are beginning to tighten their purse strings. In October, unemployment increased while auto sales fell markedly. In a move to boost consumer and business confidence, the Federal Reserve last week cut the benchmark federal-funds rate by half a percentage point to a 41-year low of 1.25 percent.

However, boosting confidence in an economy overshadowed by fears of war will be difficult. President George W. Bush, his hand strengthened by a Republican victory in the midterm elections, appears ever more determined to strike against Iraq. The United States is now backed by a new U.N. Security Council resolution requiring Baghdad to disarm — a de facto ultimatum that could lead to military action if it fails to comply. The Iraqi agreement to allow U.N. inspectors back into that country, as it stands, falls short of satisfying Washington.

The economic risks of war are certainly not lost on the Federal Reserve. In a statement, it said, “incoming data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment,” although lower interest rates, coupled with productivity gains, are “providing ongoing support to economic activity.”

The Fed’s concerns about “geopolitical risks” — a veiled reference to a military campaign against Iraq — must be shared worldwide, given the country’s potent position as a major oil producer in the volatile Middle East. If a war does comes to pass, the U.S. economy will likely fall back into recession, touching off a global slump. Yet the Bush administration, in its devotion to antiterrorism since Sept. 11, 2001, appears to have forgotten the importance of America’s pre-eminent economic leadership.

At this year’s G8 economic summit in Canada, for instance, President Bush’s chief concern was to promote international cooperation in the fight against terrorism. That was also his primary aim at the latest Asia-Pacific Economic Cooperation forum. Antiterror talks dominated both sessions, pushing economic issues to the sidelines. Given the growing terrorist threats, that was probably unavoidable. However, the dominance of security concerns heightened the sense of economic uncertainty.

What if the U.S. goes to war against Iraq? The economic impact will vary depending largely on the scale and duration of the war. One thing is certain: An operation in Iraq will be different from the campaign in Afghanistan. A spike in world oil prices, particularly in winter when demand is strong, could shake up the global economy. Japan, which depends almost entirely on foreign oil, would be hit particularly hard.

One of history’s greatest lessons is that peace, not war, pays rich dividends. America’s boom of the 1990s, the longest in its history, was due largely to the “peace dividend” brought by the end of the Cold War. Major reductions in military spending, coupled with large tax cuts, stimulated consumer spending, turning a huge budget deficit into a surplus. The Bush administration has substantially increased defense spending; the budget is now back in deficit. Unlike the Persian Gulf War, which lasted only a short time, a new war against Iraq could prove far most costly.

Adding to uncertainties over the American economy is a growing view that the past decade of prosperity may have been not so much a boom as a “bubble” — an inflation in high-tech stock prices fueled by an information-technology revolution. In this view, the collapse of the bubble may lead to protracted economic stagnation in the U.S., just as the burst of Japan’s bubble in land and stock prices set the stage for a prolonged slump.

U.S. stock prices have dropped 40 percent, by an estimated $8 trillion, from their peak. The fall has accelerated partly because investor confidence at home and abroad has been shaken by a spate of accounting scandals involving leading corporations such as Enron and WorldCom. The world has learned, much to its dismay, that American capitalism is not necessarily a global model for openness and fairness.

Now, nonperforming bank loans are reportedly increasing, though their amount appears to be small compared with the gigantic volume held by Japanese banks. The trouble, analysts say, is that it is difficult, as in Japan, to grasp the real magnitude of bad debts. If that is the case, the American economy may be in worse shape than it looks.

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