Will they? - attack Iraq, of course. Present and past advisors to various U.S. Administrations have been almost unanimous in their advice that the U.S. should NOT attack Saddam. But in two speeches over the past week, Vice President Dick Cheney has made it clear that as far as he is concerned - THEY WILL - no matter what. So far, Mr Bush's contribution to the "debate" is to declare that he is studying all the "intelligence" and that he is a "patient man".
This weekend is the Labor Day weekend in North America so next week (Sept. 3-6) is a shortened trading week in the U.S.. The week after that, (Sept. 8-12) marks the first "anniversary" of 9/11. We know that everyone who is anyone will be in New York during that week. We know that HUGE commemorative events are to be held. We know that those in charge of "security" are quaking in their boots. There have even been suggestions, since rejected, to ban ALL "foreign carrier" flights in and around New York on 9/11. We know that Mr Bush has talked about going to Congress (which re-convenes next week) over Iraq. We know that he has even talked about getting a vote at the United Nations Security Council.
We know that despite the fact that the Saudis have refused to host any U.S. attack forces and the Egyptians have refused to open the Suez Canal to U.S. warships, the U.S. military has already built up a HUGE presence in the Middle East. We know that European and Asian leaders are all but unanimous in stating that the U.S. should NOT go to war with Iraq. To the best of our knowledge, the only "high ranking" foreign politician who has come out in full support of Mr Cheney's recent comments is Australia's Foreign Minister, Mr Alexander Downer. Even Tony Blair is backpedalling as fast as he can while still trying to keep his balance.
In short, we know that the whole world is waiting for Mr Bush to make up his mind, while the longer Mr Bush delays, the harder it is going to be for his Administration to proceed. This is true on two fronts. Militarily, it is not possible to keep the U.S. forces already arrayed against Iraq "in limbo" for an indefinite period. Politically, the Congressmen and Senators up for election in November have just had a month of politicking in their home States. They have talked to their advisors. They have even talked to some of the people who will vote for them - OR AGAINST THEM - in November. They know that Mr Bush's popularity is inexorably declining, as is acceptance of the reasons for an attack on Iraq. If they see it as being politically advantageous to oppose the Iraq invasion (and many of them will), they can if they so choose cause a lot of trouble when they re-convene in Washington next week.
And on a geopolitical level, the U.S. risks a "backlash" of undetermined severity amongst its allies if it chooses to go despite their advice to the contrary. The most likely form that this backlash could take is for foreign investors and/or foreign governments to accelerate the already ongoing reduction in their U.S. assets.
The U.S. has already plastered "band aids" over the holes in their economy. The U.S. stock markets soared - and the $US Gold price dived - in the last week of July. While the FOMC did not cut rates when they met on August 13, they left no one in any doubt that they would if they "had to". The "Corporate Responsibility" act is now law. Mr Bush had his three-hour economic "forum" on August 14, after which he went back to reading his "intelligence" in Texas. Uruguay was "bailed out". Brazil was "bailed out". The result of all this has been that almost all U.S. markets have been in limbo for the past month. Gold (see this week's Bull Market report) actually outperformed both U.S. stock markets and the U.S. Dollar in August, but no market rose or fell very much.
We cannot see the U.S. Adminstration NOT going to war with Iraq. To back away, having already invested such a HUGE amount of political capital both inside and outside the U.S. would be a fatal blow to both the credibility of the Administration and to their cherished fight against terrorism. It would also remove the distraction from in front of the eyes of the American people, leaving them free to focus on what is ACTUALLY going on INSIDE the United States. This focus would home in on the REAL state of the U.S. economy and on the REAL dangers to the American way of life posed by the federal government. That is the reason why the war was planned in the first place and why the Bush Administration has gone so far out on a limb with it despite all the opposition, both domestic and international.
On September 11, the 9/11 commemorations are held in New York. The next day, September 12, Mr Bush addresses the General Assembly at the United Nations. We do not know whether Mr Bush intends to present both the American people and the UN with a "fait accompli" by going BEFORE 9/11. We do know that if he has NOT gone by then, he will be running out of time - FAST!
So, what happens if he DOES go? Well, most people are looking back to what happened when the last war against Saddam began in January 1991. Back then, the immediate impact when the air war began on January 17, 1991 was a huge upturn on U.S. stock markets and a huge downturn in Gold. Gold, especially, was savaged, suffering a $US 40 intraday drop on January 17, 1991.
Things, however, are VERY different now. January 1991 was shortly before the final collapse of the U.S.S.R.. All the talk in Washington was about the "peace dividend" (remember that?). In 1991, Mr Bush Senior had both Congressional approval and a widespread alliance, built up in advance. And the 1991 Gulf War was actually fought at a "profit" by the U.S. as their allies, notably Japan, paid for more than the cost of fighting it.
September 2002 is COMPELETELY different. The U.S. has never had any "peace dividend". The U.S. government did NOT reduce their debt by one single penny, and now deficit spending is ballooning out of hand. There is no "alliance" this time. The U.S. faces not only the cost of waging the war but the ongoing cost of the "peace" in an occupied Iraq. Perhaps most important of all, back in 1991, Americans were emerging from a two generation period called the "Cold War". Throughout that period, the REAL threat of attack from a nation which truly WAS bristling with "weapons of mass destruction" was ever present.
Having emerged from that threat unscathed, Americans quickly adopted the understandable attitude that no matter what their government did, nothing "bad" could happen to them. That illusion was NOT held in the 1950s, '60s, '70s, and '80s, even though the cold war never escalated into a hot one. It was held in the decade between 1991 and 2001 - until 9/11 shattered it.
The past year has seen the illusion of U.S. invulnerability shattered on both the economic and the actual physical front. If the U.S. DOES go to war in Iraq, it will undoubtedly "win", although it may get a bloody nose in the process. But what happens AFTER the victory is declared is truly a "no win" situation. Since the advent of the Moslem religion in the 6th Century AD, no nation or group of nations has EVER succeeded in "pacifying" what is now called the "Middle East".
Neither we nor anyone else can say with certainty what is about to happen. We don't know if there will be a successful attempt to batter the Gold price back below $US 300 in the lead up to or at the start of any U.S. war with Iraq. We do know that if the U.S. tries to single-handedly police the entire Middle East, it has bitten off more than it - or any other nation or group of nations - can chew.
In historical times, of course, Gold always went UP when war was perceived to be imminent or when it was announced to have started. There was also a retreat into Gold whenever paper markets were not performing well or were retreating. Neither has happened to any great extent so far this time. The best that can be said for Gold is that it has regained its post-1978 historical $US 300 floor. This time, we do not think that the U.S. has the heft to fight a unilateral war in the Middle East while at the same time supporting its own economy, markets and currency and holding the Gold price DOWN. This time, one of these will have to give, and when one does, the rest will follow.
As long as Gold remains above $US 300, the bias, economic, financial, and political, is all on the upside. 9/11 - 2001 - marked the shattering of the illusion of U.S. invinciblity. Now, a year later, the U.S. is on the verge of a desperate gamble to get that aura back. If it tries, it will fail. Better not to try.