In the last few days, as the warring rhetoric between the U.S. and North Korea has ratcheted up again, the capital markets have taken it well -- with only a relatively minor shift toward U.S. Treasuries and gold, when considered in relation to the shrillness with which the media is treating the situation.
I've addressed the subject of war and its relationship to economics and financial markets on several occasions over the past several years -- recently in the columns, When All Else Fails, Go To War, and When War Is a Win-Win Scenario.
The current rhetoric -- and even the specific threats being issued by the North Koreans -- are consistent with their established norms since the armistice of 1953. The rhetoric being used by the Trump administration is consistent with everything he stated during his campaign. It does, however, represent a new U.S. policy with respect to war in general, and to North Korea specifically.
What is different about the North Korean rhetoric this time is that they are on a trajectory to be able to deliver on their threats very soon. That requires taking the situation more seriously.
What is different about the U.S. engagement of the North Koreans this time is that it is based on Trump's belief that warring, as it stands, is uneconomic -- and his belief that he can make it once again economically efficient.
This is a profound shift in policy not only for the U.S., but for the world.
Trump's foreign policy philosophy is grounded in economics. The common thread of logic throughout his policies of renegotiating NAFTA, withdrawing from multilateral trade agreements, withdrawing from the Paris Agreement, restructuring the funding of NATO, and others, is that they are all counterproductive economically -- not just to the U.S., but to all parties. They provide a net economic drag that hurts everyone.
He's extended this concept to include war itself.
His belief is that wars should be fought as efficiently as possible. It simple terms, that means that they should be fought quickly with the goal of winning and forcing the cessation of hostilities with the least expenditure of time, money and human casualties.
This is, in essence, a return to the post World War 2 policies of "massive retaliation" and "mutually assured destruction" that were prompted by the desire to prevent another world war. But they were quickly superseded by the extension of the doctrine of proportionality to warring -- which was then adopted by the U.S. in Vietnam as the McNamara Doctrine, and which has since been adopted by sovereigns globally as the "proportional response doctrine."
The principal problem with that policy is that it lowers the cost and risk of warring -- and thereby encourages warring by requiring warring parties to engage only at the level of the least capable.
This means that small countries are on an equal footing with large countries and it also invites non-state and terrorist actors to engage.
Trump's policy is intended to discourage such activity and to get countries and resources to focus on economic means of advancing all of humanity.
This can't be done unilaterally by the U.S., though, so the current rhetoric with respect to North Korea is about a sea change in the global policy of warring and preventatively preparing for war.
That prevention requires that a threat of "massive retaliation" be credible -- and that requires a massive arsenal and increased investment in technologies associated with warring, both defensive and offensive.
This process was mathematically inevitable, though, as the proportional response doctrine has failed to prevent war and reduce the costs of warring. It's not just a Trump doctrine that the world will have to try to deal with only during his administration.
Right now, the best issue to focus on -- in trying to determine if the world is moving in that direction -- is the restructuring of the Japanese constitution to allow the country to have a military again, rather than the self-defense forces currently allowed.
Regardless of what happens now, though, it is likely that the world will move away from "proportional response" and revert to "massive retaliation" preparedness.
That will require investments in militaries and the companies best positioned to capitalize on such are the US defense contractors; Lockheed Martin (LMT) , Boeing (BA) , General Dynamics (GD) , Raytheon (RTN) , Northrop Grumman (NOC) , Science Applications International (SAIC) and CACI International (CACI) .