As the U.S. economy has softened this year, I am increasingly
irritated by those who draw references to the shallow recession
of 1990-91, without mentioning the impact of the Gulf War!
Of course, those who fail to bring up this rather important event
were probably in elementary school at the time. Anyone who
lived through that thankfully brief period, however, recognize
that it was kind of scary, and those who don”t think Iraq”s
invasion of Kuwait had any role to play in investor and consumer
sentiment are full of it.
But in order to look at the response of the stock market, which
went through a quick bear market in 1990 before taking off in
1991, let”s review why Saddam Hussein felt that the world would
ignore his act of aggression.
In 1979, the Ayatollah Khomeini emerged in Iran and the nation
was convulsed by revolution. For the U.S., one consequence
was the taking of the American hostages. Khomeini called on all
Muslims to restore Islamic society and next door in Iraq, Saddam
Hussein found this rather unsettling, particularly because his
nation”s leadership ranks were primarily Sunni Muslims, while
the Shiite majority was looking to Tehran with longing eyes.
Saddam thought that the only thing to do, to save his own skin,
was to invade Iran while that nation was engulfed in turmoil. So
in September 1980 Saddam launched what would become the
longest conventional war of the 20th century, with total casualties
in excess of 1 million before the UN brokered a cessation of
hostilities on August 8, 1988. In the end, neither side captured
any land.
Because of the Iranian hostage crisis and the revolutionary goals
of the Ayatollah, America came to Saddam”s aid during the Iran-
Iraq war, as did many of his Arab brethren who feared the
spread of the Iranian revolution to their countries. In 1983-84,
for example, Baghdad”s trade with Washington was three times
the value of its trade with the Soviet Union, officially its primary
patron. And France, Germany, Britain and other NATO states
also chipped in with either weapons or high-tech equipment.
[By 1990, Iraq had received in excess of $500 million worth of
American technology – advanced computers, lasers, and
specialized machine tools related to the development of
missiles.]
Throughout this period, the U.S. had overlooked the dark side of
Saddam Hussein”s regime. We were following the old principle
of “the enemy of my enemy is my friend.” This in spite of
Saddam”s constant threats against Israel, as well as the
overwhelming evidence that he was developing biological,
chemical, and perhaps nuclear weapons. And everyone knew
that Hussein had employed poison gas against Iran, while using
chemical weapons against the Kurdish minority in Iraq.
The day after a cease-fire was reached between Iran and Iraq (no
formal treaty was ever signed), Iraq”s neighbor Kuwait raised its
production of oil, in contravention of agreements reached with
OPEC. The price of oil, of course, fell, and Saddam was furious.
Deep in debt as a result of the war, and totally reliant on oil
revenues, he called Kuwait”s move “economic aggression” and
demanded that Kuwait reduce its production, as well as cancel
Iraq”s debts. Then Saddam supplied us all with a clue as to his
future actions when he brought up long-standing border disputes,
going back to the creation of Iraq.
But the U.S. was not concerned in the least. A secret National
Security Directive of October 1989 said: “Normal relations
between the U.S. and Iraq would serve our longer-term interests
and promote stability both in the Gulf and the Middle East. The
United States should propose economic and political incentives
for Iraq to moderate its behavior and to increase our influence.”
Aside from offering a large amount of agricultural aid, the U.S.
then continued to supply Iraq with high-tech equipment. And
while Saddam continued to make waves over Kuwait,
Washington tended to ignore the potential threat.
Then in mid-1990, Saddam made his claim that Kuwait was
draining oil from an Iraqi field on the border and threatened to
use force to take it back. There were hints of Iraqi troop
movements.
U.S. Ambassador to Iraq, April Glaspie, sat down with Saddam
and indicated to him that the U.S. had no position on bilateral
differences between Arab states, but that the use of force would
be contrary to the UN Charter. Later, Saddam was to say that he
felt the U.S. had given a green light for invasion. Glaspie later
testified before Congress that the main American mistake was
not to “realize he was stupid.”
Meanwhile, what of the U.S. stock market? After a 27% gain in
1989, the Dow Jones started 1990 at the 2753 level. On June 30
it had advanced to 2880. Then on July 13 it crossed the 3000
level for the first time, but didn”t close above that mark. On July
16 the Dow finished at 2999.75 and on the 17th, even with an
intraday high of 3024, it still failed to end the day at the magical
3000. Once again, the close was eerily 2999.75. By July 20, the
Dow was at 2961 and then a week later, 2898. As the month
wore on, Iraqi troop movements on the Kuwaiti border may have
been noticed by some in the intelligence community, but the
Bush administration and the rest of the West seemed
unconcerned. Saddam is just posturing, our leaders thought.
Next week, part two; an extensive look at market reaction to the
invasion and the coalition response.
Sources:
“American Heritage: The Presidents,” Michael Beschloss
“The Century,” Peter Jennings
“The Presidents,” Henry Graff
“America: A Narrative History,” Tindall & Shi
“The Message of the Markets,” Ron Insana
“The Twentieth Century,” J.M. Roberts
“One World Divisible,” David Reynolds
“We Interrupt this Broadcast,” Joe Garner
[*Portions of the preceding were also included in a 12/23/99
piece I did for “Hott Spotts.”]
Brian Trumbore
