Prior to September 11, we had been warning against holding equities because of the drag of monetary deflation. That purely economic problem has not been eliminated and will continue to be a burden on the financial markets and real economy. September 11 added what we could call “the Terrorist Tax.” This is not some exaction by government to finance anti-terrorist activities. A Terrorist Tax is a psychological burden on local, national and global commerce -- a distinct wedge between producers of goods that we can see most clearly in the airline, hotel, financial and insurance industries, but which ripples through every other sector of the economy. The sharp market decline last week had almost nothing to do with the deflation, and everything to do with the terrorist tax. As we detailed last week during the sell-off, every hawkish statement out of the administration -- “Sheriff” Bush saying he wanted Osama bin Laden “Dead or Alive,” the Pentagon decision to show muscle by bombing southern Iraq -- caused instantaneous market declines to reflect the increased risks of escalation.
Where there were rallies last week, they occurred with news that the Taliban clerics asked Osama bin Laden to leave the country voluntarily. Friday’s early sell-off reflected foreign assessment of President Bush’s hawkish address to Congress, but the recovery in the late afternoon reflected the local assessment that his bark was worse than his bite. I slept more easily Friday night knowing the appointment of Pennsylvania Governor Tom Ridge to a new cabinet post on homeland defense meant that the doves had won the internal debate and the “bombers” at the Pentagon had lost, at least for the time being. All the news coming out of Washington over the weekend, especially the Sunday talk shows, further confirmed that there would be no military escalation that would risk more terrorism in American cities.
What we do not know yet is whether this is a one-time tax -- an assessment that will not have to be repeated -- or if it will be an annual or quarterly levy. The market advance this morning in Europe and the healthy opening on Wall Street is the first hopeful sign that the risks of more terrorism in the near future are reduced. When President Bush appeared in the Rose Garden this morning, he had at his side Treasury Secretary Paul O’Neill and Secretary of State Colin Powell, with no sign of Defense Secretary Don Rumsfeld. The announcement of suspending various financial dealings of suspected terrorist organizations is clearly a fig leaf to cover the administration’s inaction on the military front. But with every passing day, the diplomatic skills of Secretary Powell seem to be working in the absence of any logical alternative. There has been no “bite,” and the barking has been muted. The only false note, from Powell and the President, is in ascribing the wrong motives to the 19 suicide bombers -- that they hate the U.S. because “they don’t like our value system,” or “they hate democracy or capitalism,” or “they envy our wealth and freedom.”
The ridiculous idea that the terrorism “had nothing to do with Israel” is the hawk-party line, but it was nice to see National Security Advisor Condaleezza Rice tell CNN’s "Late Edition" Sunday that out of this mess may come genuine and successful negotiations between the Palestinians and the Israeli government. Of course, if and when that happens, there will be no more kamikaze acts in Israel or the United States. If the 1993 bombing of the WTC was meant as a “wake-up call” that did not wake anyone up here, the September 11 political terrorism woke up Americans in a way that will not be forgotten. In watching “60 Minutes” on CBS last night on a segment devoted to “The Mind of a Terrorist,” I thought how salutary it would have been to have such a segment after the 1993 bombing, even in 1998 when I twice urged Congress to hold hearings on this subject. The Israeli Lobby nixed any such idea, as it would have opened a can of worms involving serious discussion about the Pentagon using Muslims for target practice in and around the Middle East. The Jewish political establishment means well, but the road to hell and September 11 is paved with good intentions. My expectation is that a rebalancing of political interests will lead to a positive outcome of renewed negotiations, when the Sharon government is able to begin them without his government falling. The American Jewish Committee should assist in that process, but there still is no clear sign that it knows what to do. Remember the hawks are resourceful and still have some power levers.
Some of you may have tuned in CNN’s "Evan&Novak" on Saturday or Sunday, expecting to see Louis Farrakhan discuss the situation from the Muslim perspective. Instead, you found Sen. Jesse Helms [R-NC] mouthing the Pentagon party line as drafted for him by the civilian intellectuals there who advocate all-out war on “Islamic fundamentalism,” which means an all-out war on Islam. This was not CNN’s fault. I had persuaded Min. Farrakhan to do the show after hearing his Chicago Sunday speech and press conference on September 15, believing it would have a salutary effect on the national discussion, and possibly help move the Islamic political world in a positive direction. Farrakhan canceled when the Nation of Islam ministers across the country feared his appearance might have the opposite effect and urged him to postpone media appearances. I am personally gratified that so many of you took the trouble to read his Chicago speech and tell me how it helped you see why I have been seeing him as a positive force, perhaps even key to peace in the Middle East. On "FoxNewsSunday," Tony Snow surprised me by reading parts of the Farrakhan speech and commenting favorably. If those important rabbis who have been meeting with Farrakhan in recent months show a public willingness to confer with him, the future would look brighter.
While this Monday commentary is happily positive on the terrorist front, we should not forget the deflation, which still has not been dealt with in a serious way. The price of gold has backed down today by $3, to $287, and if the risks of military action recede it will fall further. Meanwhile, the White House and the Congress discuss various tax-and-spending nostrums to deal with the fundamental weakness in the economy, none of which will fix the basic problem. A meeting planned for September 17 between Vice President Dick Cheney and Jack Kemp to discuss monetary deflation and a change in Fed policy was of course scrapped. We had hoped that Cheney would come out of such a meeting with a recommendation that Treasury take a look at the issue, but it may be some while before it can be addressed. There is still discussion of a small, temporary cut in the capital-gains tax, coupled with an increase in the minimum wage. In this environment, we do not see much to be gained by that combination and expect that once Congress gets rolling it will produce Keynesian pork barrel spending as federal, state and local tax revenues shrivel. The September/October issue of the American Spectator is now out, with my piece on “The Deflation Monster.” In 6,000 words, I try to tell it all, in a way that should leave little doubt that the floating dollar is the second biggest problem facing the world economy. If we had not switched to the Internet, we would be able to snail mail you copies, but you can get it at the bigger newsstands or by subscription.