According to Michael Greenstone of the MIT Economics Department, in his new NBER working paper, "Is the 'Surge' Working? Some New Facts" (NBER Working Paper 13458, 10/07), while various on-the-ground Iraqi indicators are mixed, perhaps the most salient fact is that Iraq's bonds have declined by 40% since the surge started. He concludes:
"This decline signals a 40% increase in the market's expectation that Iraq will default. This finding suggests that, to date, the Surge is failing to pave the way toward a stable Iraq and may in fact be undermining it."
Bond prices reflect, of course, people betting real money for real payoffs down the road, either good or bad. This market, unlike that for Washington punditry, is one in which it actually pays off to be right, rather than wrong.
Thursday, October 25, 2007
Interesting National Bureau of Economic Research study of the Iraq "surge"
Posted by Daniel Shaviro at 1:30 PM
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Wouldn't this be fairly consistent with the increasing possibility of the three-state solution, or a very weak federal government? Thus, a weakening central government (more likely to default) doesn't seem incompatible with a more stable Iraq- which seems, at least initially, to be the case considering the extreme declines in casualty totals since the surge began.
Could be. Except, you might think devolution would be likely to involve splitting up the debt, not renouncing it.
Also, I was short of time when I posted and haven't read the paper yet. Obviously, a standard empirical problem is whether the problem would have gotten even worse but for the surge. But I don't think its proponents would be happy with having merely lowered the increased expectation of default that would otherwise have occurred from (say) 70% to 40%.
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