Attack and Distract

Markets around the world plummeted last week after a terrifying war of words between North Korean leader Kim Jong-un and US President Donald Trump. Both leaders ramped up the rhetoric to suitably epic proportions, threating “doom” and “fury” to the other’s nation.

Whilst tensions between the two nations have been high since North Korea’s nuclear tests at the start of the year, the situation was largely stable until the UN Security Council passed a fresh round of sanctions on North Korea in early August.

The US described these sanctions as the toughest ever imposed the Security Council, and they target a lot of the export revenue that the North Korean regime relies on. The sanctions were backed by China and Russia, somewhat isolating North Korea, who still directed their verbal reprisals towards the US.

These verbal reprisals, and the inevitable responses from President Trump are what caused markets to plummet. With existential threats being made across both sides of the pacific, US equity markets had their worst one-day falls since May; dragging most of the world’s stock markets down with them.

The US VIX – stock market volatility index, often called the “fear index”, had been trading around historically low levels before the latest exchange of threats, but it jumped an incredible 44 percent with the falling share prices; triggering many investors to run for safe haven assets such as gold or cryptocurrencies.

The response of the market would indicate that many believe there is a possibility of a military confrontation. And whilst it’s certainly true that the North Koreans have attacked western military forces in isolated incidents in the past, I feel that the likelihood of violence this time around is miniscule.

For this confrontation to escalate, either side will need to take the next step. It is precisely for this reason why I doubt anything significant will happen this time around; as it is in neither side’s interest.

People often assume a degree of irrationality in the actions of the North Korean regime, but they are one of the last seriously despotic dictatorship left on earth for a reason. This is because they understand, and know how to play the geopolitical game.

The North Korean regime knows they would lose a military confrontation without Chinese support (which even then would be touch-and-go), and China has explicitly stated that will remain neutral should North Korea attack first – which would ensure the end of North Korea, and the Kim regime.

Similarly, should President Trump launch a pre-emptive strike on North Korea he not only risks throwing the world into a nuclear war, he would also be undoing all the progress made with the Chinese and Russians in isolating the North Korean regime.

So why are both sides seemingly happy to escalate the stoush to such dangerous proportions?

Well, my belief is that the bluster coming from both sides was aimed at domestic consumption. North Korea doesn’t exist in a vacuum – and the loss of support from China, as well as a potential drought, and increasing contact from the outside world threatens the perpetuation of the Kim regime. I believe they are using the “Great Enemy” (U.S.) to distract their citizens from the legitimate domestic issues in a similar way to the perpetual war of the novel “1984”.

Kim Jong-un or his advisors therefore appear to be attempting to unite the North Koreans against outsiders in an attempt to increase his own control, and reduce the risk that his citizens unite against him.

Similarly, President Donald Trump is facing high disapproval levels in the US, and he may be using the North Koreans in an attempt to distract his own population from the various things he is currently being criticised for. He has even accused former President Barack Obama of the same thing in the past, tweeting “Polls are starting to look really bad for Obama. Looks like he’ll have to start a war or major conflict to win. Don’t put it past him!”

Given Trump’s acknowledgement of this political tactic, as well as his propensity for hypocrisy, I’d argue he is doing what he threatened Obama would do – trying to distract his citizens through conflict.

Both sides have had somewhat rational and strategic reasons for an aggressive war of words, but neither side would be benefitted by triggering an actual military engagement. It is therefore my belief that this situation will slowly blow over until it once again serves one of the sides by restarting the bluster.

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