The financial commentators have now come around completely to the idea that Iraq dominates risks in holding equities and that the dollar/gold price rises or falls with risks of war. A common theme is that uncertainty itself is what is causing the business world to pull in its horns. Once the war begins with bombs falling on Baghdad and ground troops of a “coalition of the willing” crossing into Iraq from Kuwait, and perhaps Turkey, there will be relief from uncertainty. Recovery in the markets and economy will follow.
I’m still not seeing any reason why President Bush will be able to get a second UN resolution that explicitly authorizes “all necessary means” to take out the Baghdad regime,” where there is every sign that Saddam Hussein is prepared to use “all necessary means” to protect his regime with diplomatic initiatives. The Washington Post Thursday carried a dispatch out of Baghdad that Saddam has become “emboldened” by the global demonstrations last Saturday and there are suddenly fewer signs of cooperation with UNMOVIC’s Hans Blix and IAEA’s Mohammed Baradei. The report was soon being cited by the warhawks who abound in Washington with new hope that they will get the war they are yearning for.
I spoke to the Iraqi UN Mission and was told to ignore the story, noting that it certainly did not come from Blix or Baradei. They said Baghdad was in fact preparing the lists of workers who had destroyed bio weapons and missile systems in the summer of 1991 in order to close the last gaps in the chem/bio process. I asked if their government would destroy the Al-Samoud 2 missiles that Blix last week reported had exceeded the allowable range by a few kilometers. The reply was that they had not yet been asked to do so by the inspectors but there had been an agreement that they would comply if asked. The inspectors might agree to an adjustment to the engines of the roughly 100 missiles in the arsenal to knock back their range. In this morning’s Investor’s Business Daily, there is an item from Baghdad that the government had turned over the names to Blix and that the UN will soon decide whether or not the Al-Samoud missiles need be destroyed.
The reason it is widely assumed war is inevitable is the warhawk rhetoric still coming out of the President and his entire national security team. But if the plan was to keep the threat of military action as credible as possible in order to squeeze every last concession out of Iraq, one would expect hawkish rhetoric across-the-board. Secretary of State Colin Powell has become the most hawkish of the team because I believe he knows the President is not so reckless as to start bombing Iraq when the UN inspectors report all the i’s have been dotted and all the t’s crossed. When all that is left is to complete the interviewing of all those who are being made available to close the books on current disarmament, a presidential decision to go-it-alone would invite perpetual terrorism. It would not matter a bit if Saddam is eliminated in three days and the Republican Guard comes out with its hands up. Once the bombs begin dropping, there will automatically be a commitment of vigilantes around the world to punish Uncle Sam. Tom Ridge, director of Homeland Security, would post the red light and it will stay on for years. The Dow Jones Industrial Average might stabilize at 5000 but with the price of gold at $500 or more.
The UN inspectors will now return on March 7 to issue another report and we will continue to hear the war drums from the administration right through what will be another positive report from Blix and Baradei. The next step will be for the UN to demand that Iraq agree to perpetual inspections by UNMOVIC and IAEA and strict adherence to the regulations devised in 1999 to close off the possibility that clandestine programs can be mounted by importing the tubes and nuts and bolts required to assemble weapons of mass destruction. Will Iraq agree to all these conditions? Of course they will. Why don’t they do so now? They haven’t been asked. Why haven’t they been asked? Because the inspectors are following a sequence where that is the last request to be made, after certification that all the paper gaps in the disarmament process have been secured.
And will that be the end of it? Not exactly. The administration will not permit the sanctions to be lifted even if the inspectors give their 100% seal of approval. President Bush Thursday made the comment in one of his press briefings that Iraq’s “wealth” was a great problem for him. This of course has always been the problem for at least those hawks whose primary concern is the security of Israel. If Iraq was not swimming in oil wealth, Tel Aviv would never have enlisted the aid of the neo-con intellectuals led by Richard Perle and Paul Wolfowitz. The closer the administration gets to the brink of war, the more the political establishment is understanding the connections between the Likud Party in Israel and the vast Perle network in the executive and legislative branches.
It is harder to see how Arab/Israeli politics will play out against the backdrop of a diplomatic solution in Iraq that leaves Baghdad burdened with the sanctions. It cannot play out the way Perle and Wolfowitz wish it to, because they are beholden to the idea of a Greater Israel without a valid Palestinian state. President Bush still seems more or less committed to a Palestinian state. But it does seem reasonable that at some point in the diplomatic time line we will be either demanding that Baghdad engage in democratic political reforms... or Baghdad will be doing so without prompting. Once it has the support of the world community by being absolutely cooperative on the disarmament issues, Iraq will be able to gather the same kind of support for the lifting of the sanctions and an end to the bombing of the “no-fly zones.” I can imagine them proposing federal-type political reforms that even satisfy the Kurds. A Swiss canton solution is the most obvious one.
It may seem odd for me to be even discussing these ideas when others are still discussing the inevitable war and how it will be fought, but there is no way I can explain the way the chess game has been played thus far with war at the end of it. There will be little ups and downs in the market as the rest of this phase of the game plays out, but my best guess remains that it will take until April before it becomes absolutely clear that there will be no bombing of Baghdad, but as we go from where we are to early April, the DJIA will creep back to 9000.