North Korea's progress in missile and nuclear weapons testing creates a problem for President Trump, and keeps alive the risk of a dangerous miscalculation.

Intelligence assessments continue to indicate that the Democratic People's Republic of Korea (DPRK) has made significant advances in key areas. It has solid-fuel rockets as well as liquid-fueled ones, which matters because solid-fuel rockets can be launched more quickly and thus can be loaded onto harder-to-target mobile launchers. It also now has a long-range inter-continental ballistic missile (ICBM) capability. In addition, North Korea has made advances in nuclear miniaturization and can almost certainly put a nuclear warhead onto a missile, although whether the warhead could withstand the heat of re-entry remains unclear. Its ability to guide missiles also remains unclear. In all, North Korea has more nuclear capability and warheads than experts thought a few months ago and a recent test, which may have involved a hydrogen bomb, is another important advance. While rockets are subject to very high failure rates, that is not going to be very reassuring to those who might find themselves in the path of one.

Kim Jong-un confronts U.N. sanctions

North Korea made moves during the summer in response to the regular annual joint military exercises involving the United States and South Korea, and to the United Nations decision to tighten sanctions on the regime. The North launched a missile that flew over Japan and came down in the Pacific Ocean just south of the Kurile Islands, ownership of which is disputed between Japan and Russia. Its subsequent underground nuclear test was very large. This was widely seen as an indication that Kim does not intend to be deterred by the U.N. sanctions, and it was a clear escalation in the type of response from the DPRK that we have seen in past years around the time of the joint U.S./South Korea military exercises. In addition, North Korea continues to threaten Guam, although in terms that are somewhat milder than during August.

President Trump recently insisted that "all options are on the table," and he has the difficult task of making the threat of preemptive military action credible, when most people think it is not.

In an interview conducted and published shortly before he left the White House, the President's former strategist Steve Bannon commented that there are no viable military options to disarm North Korea preemptively given the damage that it could inflict very quickly on Seoul. And therein lies the problem. President Trump recently insisted that "all options are on the table," and he has the difficult task of making the threat of preemptive military action credible, when most people think it is not. At the same time, it remains true that, if a war were to start, the North would lose heavily and quickly, but not before massive losses in Seoul and elsewhere.

We have leaders of two countries threatening each other, and one of those countries is launching missiles and conducting nuclear tests as well.

Despite its actions, it still seems clear that North Korea does not want to start a war. However, there is the possibility that one side or another will make a serious miscalculation. George Bush's team and Saddam Hussein did, and we are still living with the consequences.

Are North Korean nukes here to stay?

The Japanese and others think there is a path of mutual de-escalation, but it means that the United States must learn to live with the DPRK as a nuclear power. We'll just have to see if this is the path that ends up being taken. In the meantime, we have leaders of two countries threatening each other, and one of those countries is launching missiles and conducting nuclear tests as well. The risk of something going horribly wrong may not be very high, but it is higher than one would like.

Trade tensions with China remain possible

It's also worth noting that it is not only the raw geopolitics of this crisis that are concerning. China and the United States approach the problem differently, and their interests do not align. As the United States moves to tighten sanctions against North Korea, it is possible that more Chinese companies will be affected. Trump has made some claims that have been interpreted in Beijing as indicating a willingness to use trade as a way to pressure China to cut off oil supplies to North Korea. And there remain important voices in the White House that would love any excuse to increase the likelihood of trade measures against China. Needless to say, a trade war with China would have important economic repercussions.


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As the summer winds down, the outlook for Fed policy, the North Korea crisis, and the questions surrounding U.S. tax reform remain the chief areas of uncertainty for the global macro picture.