A War Scenario
Jude Wanniski
February 27, 2003


Memo: To Website Fans, Browsers, Politicians
From: Jude Wanniski
Re: The War Scenario

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 [http://polyconomics.com/showarticle.asp?articleid=2442] 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.