The War Market IV Jude Wanniski April 8, 2003

As far as the financial markets are concerned, the war in Iraq is over. Once it became clear the primary oil fields were under Coalition control and Iraq showed no inclination to torch them in any case, the world oil price fell by $10 a barrel. So did gold, skidding into deflationary territory at $320 as war risks receded and as the supply-side tax bill advanced on Capitol Hill. In a report March 18, the day before the war officially began, I said the war itself should not take more than several weeks. It seemed clear to me at least that Baghdad did not have anything it could throw at the Coalition forces that could cause casualties en masse -- having been stripped of any weapons of mass destruction by the UN inspection teams. I had, though, assumed the Iraqi army would put up a fight with weapons on a WWII level, unlike the performance in the Gulf War when it was in retreat even before Desert Storm began. And it still seems likely there will be firefights in Baghdad and throughout the country for some while. Resistance by the general population has been greater than had been promised by the “cakewalk” brigade. It was always too much to expect that Iraqi families would treat the allied forces as “liberators” when they are mowing down their uniformed fathers and sons by the thousands and inflicting collateral damage on civilians in even greater numbers. 

The threats to be feared would be the terrorist attacks that would come as a result of the unilateral war, with no “smoking gun” to provide legal or even moral justification. So far the good news on that war front has been the absence of news. Warnings that the war would produce a hundred Osama bin Laden’s in a clearly outraged Arab/Islamic world have to be taken seriously. But just as the financial markets did not discount the possibility of the 9-11 events, tumbling only after they occurred, Wall Street will not react unless such attacks occur in a way that disrupts commerce in general. We still have to expect that could happen in the future, but the warnings from Homeland Security and the Justice Department of Stinger missiles bringing down commercial jetliners or suicide bombers blowing up restaurants were not realized, and maybe they will never be. 

It did take Al Qaeda three years to organize 9-11 and that was without the high level of security that exists today. It will be relatively easy for terrorists to strike in their own neighborhoods, beginning with Iraqis sniping at the occupied forces and Muslim vigilantes extracting revenge against Yankees visiting their countries for business or sight-seeing, thus diminishing both. To strike directly against the United States with an internal blow at the destructive level of 9-11 is now easier said than done, given all the security screens a team would have to pass through to get from conception to deed: Learning English, getting finance, passport, plan, training, etc. Still, the hatred of Uncle Sam generated by this “war of choice” certainly makes it much more likely that attempts will be made and some may succeed. 

At the same time, all kinds of other things will be going on, cutting in one direction or another on Wall Street. The most important we watch closely is the fate of the President’s economic plan, especially the supply-side tax cuts. The White House really needs one more Republican vote in Senate Finance to nail down a Budget Resolution that will yield a really solid tax package. As we have been noting, Sen. Olympia Snowe of Maine is the lady on the margin, still dug in at the low of $350 billion even after meeting with President Bush. The WSJ beat up on her yesterday, thinking that would change her mind, but she needs an argument that she has obviously not yet heard. The editorial was surely counter-productive. The White House now has to decide on whether to make the best possible deal it can now, which would be meager, or wait for the return from recess, when somebody might come up with a creative solution. Whatever the conferees decide, it will probably be today, as the two-week recess begins at the end of the week. 

Into this bowl of spaghetti variables there is also North Korea’s threat to build nukes and lob them at its neighbors, the struggle over who pays for postwar Iraq, whether or not we expand the war into Syria, Iran or any other country that fits into the crosshairs of the new American Empire, monetary policy with gold back into deflationary terrain, and skyrocketing budget deficits that might even begin to worry me. We will deal with these as best we can in scanning the horizon for bulls and bears. For now at least, there is good news and no news that is also good. Most especially, the war in Iraq isn’t really over, but as far as the markets are concerned, it is.