Conservative supply-side economist Jude Wanniski says markets will PLUNGE if war breaks out -- regardless of whether it is long or short.
A War Scenario
Memo: To Website Fans, Browsers, Politicians
From: Jude Wanniski
Re: The War Scenario
polyconomics.com
This is the letter we sent to clients on Feb 11. We have sent several subsequent
letters with greater detail and nuance, but this still represents a fundamental view
of what we expect if the United States uses military might in Iraq without the
support of the United Nations:
Even some of the best economists I know are now saying the reason Iraq is a
drag on the financial markets is because of the uncertainty in the financial
cosmos. They argue that once Wall Street knows which it will be, peace or war, it
will be able to climb back. The economists I least respect are actually saying war
will be good for the markets. They simply look at some past wars, including the
Gulf War of 1991, and with no further analysis conclude that war with Iraq will
be bullish. Yes, the markets did surge when Desert Storm began, but that
occurred only because Iraq gave up two days before coalition troops entered
Kuwait to expel them. There was no fight, let alone a “mother of all battles,” and
it is still not absolutely certain that any of the 143 U.S. casualties died at the
hands of the Iraqis. If the President pulls the trigger without the support of the
U.N. Security Council, NATO or a fresh commitment by the U.S. Congress, I
believe the stock market will not only head down, but keep going even if the
formal war is over in a matter of days or weeks and Saddam is left hanging by
his toes in the Baghdad town square, Mussolini-style.
The situation today is really unprecedented in history because it is being seen by
most of the world as a war without justification. We have the most powerful
nation on earth threatening to disintegrate what is by now a nation that is not
only crippled by a dozen years of economic sanctions and weapons inspections,
but is also doing everything asked of it by the United Nations. My reading of
human history tells me that retaliation to what is perceived as an expansion of an
already unjust American imperium – by global vigilantes unconnected to formal
governments – will quickly bring an end to the kind of capitalism we now enjoy.
Every political economy is a form of capitalism, ours being a democratic
market capitalism. Should President Bush decide he must ignore all the
domestic and international democratic institutions that have evolved over the
centuries of our republic’s history, democratic market capitalism will soon have
to give way to state capitalism. It is not the formal war against Baghdad that
causes the problem but the global pathologies that will metastasize. Instead of
one Al Qaeda there will be dozens, hundreds of similar cancers forming in the
organic body of the world’s population.
Just as Israel finds that no matter how many homeland security steps it takes to
curtail individual terrorist acts from the Palestinian/Islamic world, the terrorists
find new, creative ways to commit suicide in ways that wreck the Israeli
economy. So too would the U.S. government be unable to detect and disrupt new
vigilante threats as fast as they were forming. In the 9-11 attack, the Al Qaeda
suicide terrorists struck at the World Trade Center, a symbol of America’s
international commercial power, the Pentagon and its military power, and made a
run at the White House. It is chilling to note that when Tom Ridge pushed the
warning color up to orange the other day, it also warned of possible attacks
against Jewish centers, including synagogues. This is because of the background
“chatter” intelligence agencies are picking up. My guess is that if Jewish
centers are hit, they would be secular, not religious. The Islamic extremists we
hear about, including Al Qaeda, do not seem to be identifying religious Jews as
the source of their problems in the Middle East or in the U.S. A war scenario
would have to include the possibility of individual suicide bombers showing up
in restaurants and theaters frequented by American Jews and blowing themselves
up. Such is the nature of social pathologies of the kind that have existed through
the history of the world.
In his annual testimony before Senate Banking on the state of the economy, Fed
Chairman Alan Greenspan today warned a prospective war with Iraq is already
causing serious problems for the U.S. economy. In our market capitalism,
economic weakness is dealt with by professional macro-economists who tweak
the tax rates or interest rates or spending programs. When the problem is a
terrorism that can shut down the commercial airline industry with a few Stinger
missiles, the President’s economic advisors might as well stay home. The federal
government will be forced to nationalize the airlines, as the markets will no
longer take the risks necessary to support a viable airline industry.
When market capitalism fails, the ruling class has no choice but to turn to state
capitalism in some form. The chaos in the world markets that would inevitably
follow a U.S. war perceived as being unjustified by the great majority of the
people in the world would be accompanied by so many bankruptcies that Uncle
Sam would be forced to effectively nationalize the banks. Federal, state and local
budget deficits would of course ramp up dramatically and so would the dollar
price of gold, oil and all other commodities. State and local governments now
having a dreadful time trying to make ends meet because of the problems caused
by the long monetary deflation would be unable to cope with the economic
distress without slashing spending, raising taxes and borrowing at double-digit
interest rates. An inflation that took up the price of gold to $1000 or more would
wipe out a good deal of the purchasing power of corporate pension funds.
This war scenario is not a “worst-case scenario,” but the most likely scenario
that would occur under a “worst-case political scenario.” It is presented here
only to help explain why I believe it most unlikely that it will occur. The “peace
scenario” I outlined last week
[ polyconomics.com ] remains my confident
forecast, precisely because I have thought through the war scenario and
concluded that President Bush and his advisers – including his father and his
wife – are most serious about allowing diplomacy to work to achieve the stated
purpose of government policy: the disarmament of Iraq. The bellicose rhetoric
coming out of the administration from all quarters is consistent with an attempt
to squeeze every possible concession from Baghdad if a bombing campaign and
follow-up invasion will not occur. As it is becoming increasingly clear, Baghdad
is complying.
Of course I could not be as optimistic had I not been in almost daily contact with
the Iraqi government for the last few years, both through the UN Mission in
NYC and the government itself in Baghdad via e-mail. I’m told directly that my
counsel has been taken in the sense that I have advised “feeding the doves” here
and around the world, by making concessions on the inspections program
whenever they are asked instead of “feeding the hawks” by digging in their
heels. Of course all this has not only been pro bono, but I have also kept our
executive and legislative branches informed of all my exchanges. When there
was resistance in Baghdad last week to permitting U-2 “spy planes” from
conducting surveillance flights, I pointed out U-2 planes are no more helpful
than the satellite photos in detecting activities on the ground and that there is no
way Iraq could thwart such spy planes anyway, as they fly far above the range of
artillery fire. It is because I believe Iraq really has been stripped of weapons of
mass destruction and will be no threat to anyone that I’m able to make
recommendations that will make sense to the Iraqi government. Saddam Hussein
is now able to say he has complied with all the demands placed on him. The
hawks have been starved and the doves are fat. As I pointed out in my “Peace
Scenario,” we should not be surprised if we hear Iraqi officialdom openly
discussing meaningful political reforms once these threats of war are removed.
___________________________
As an associate editor of The Wall Street Journal from 1972 to 1978, Jude Wanniski repopularized the classical theories of supply-side economics. His book, The Way The World Works, became a foundation of the global economic transformation launched by the Reagan Administration. He founded Polyconomics in 1978 to interpret the impact of political events on financial markets, keeping institutional investors informed on U.S. and world events that bear on their decisions. His network of long-standing relationships with members of the Executive and Congressional branches, the Federal Reserve Board and leading opinion makers augments Polyconomics` analysis. Mr. Wanniski, and Polyconomics, Inc., have achieved recognition worldwide for the efficacy of the supply-side political-economic model. Mr. Wanniski holds a B.A. in Political Science and an M.S. in Journalism from the University of California, Los Angeles. |
