Iraq is of tremendous strategic significance, and everyone knows that. Losing it would demonstrate to the world that the US is no longer able to effectively "project power" into the Middle East, where most of the world's oil is.

I would actually disagree with that, actually. In terms of projecting overwhelming force, and taking over a country in the Middle East, it showed that it could do that really easily. It's the attempt to occupy a country that failed, but that's another thing.

Plus, the grim determination to do wholly irrational things may actually have a strategic value: the USA is able to do things that are not in its immediate interest but which are highly damaging to others, so cross them at your peril. Whether we like it or not, that aspect is there.

The American economy is hollowed out. The US no longer has anything to sell to the rest of the world, aside from high fructose corn syrup and weapons. It depends on the rest of the world for oil and manufactured goods, but the rest of the world has no need for it, as Emmanuel Todd has pointed out. When it comes to having influence in the world, America has put all of its eggs in its military basket. Thus, as far as the rest of the world is concerned, without its military power (and its entertainment industry), America is nothing. That is why military defeat in Iraq would be a disaster for the US.

Apart for mthe last sentence, I agree with you - it's the economic price that will matter in the end. But as Marek points out, a few points of GDP is not that big, so we'll have to see if the consequences are just sub par prosperity for a while or something bigger.

But strategically, the focus on the military means that the rest of the world has to be careful. That's a lot worse than cooperation thanks to shared institutions and "soft power", but it's still something strategically. And that's the reasoning of the neocons, essentially: they discounted soft power and decided, for some reason, that only hard power mattered. At the basest level, it does, so do not discount the US in any case. But their presence in the world will change from that of the past century.

In the long run, we're all dead. John Maynard Keynes