Back last fall, when the Dow Jones industrial average was galloping around 8,700, we predicted this might last, but not for too long. Even if conditions of peace and stability remained, the Dow, we warned was likely to show remarkable volatility in the months ahead. We entitled the column "How to live with the yo-yo Dow."
Well, sure enough, in the last two weeks alone the Dow plunged to 7,500 and then shot back up to 8,000. If the so-long anticipated war with Iraq starts this week and is not won fast and clean, expect more plunges.
No doubt there will be more rallies too. Yo-yos, after all, go sharply up as well as precipitously down. But there are two fundamental factors driving the market far, far further down in the middle term -- do not even bother to wait for the long term -- and both of them are being driven by the central policies of the Bush administration in Washington.
First, there is the immediate reason for the current Wall Street plunge.
And that is very clearly the imminence of war with Iraq.
It is ironic in the extreme that a president who came to office determined not to repeat the mistakes -- as he saw them -- of his father a decade before is doing just that -- and then some. For President George W. Bush well understood that despite the easiest and most one-sided military victory in modern times against the Iraqi Army in the 1991 Gulf War, President George Herbert Walker Bush, or Bush 41, had gone down to defeat because he failed to see any revival of the 1991-92 economic recession in time to bail him out against the unexpectedly formidable challenge of Democratic challenger Bill Clinton.
With this in mind, Bush 43 has followed a reckless, even wild policy of shoveling money at the economy and running up renewed astronomical federal budget deficits in the hope of keeping the recessionary wolf from the door until the business cycle generates a strong new economy. He and his true believing inner circle remain convinced that further, relentless cutting of taxes -- even while all other business fundamentals are allowed rapidly to become catastrophically worse -- will be the magic medicine that brings the lasting cure.
Now, there is not the slightest bit of evidence that this indeed will be the case. But even if it was, Bush's other obsession -- war with Iraq to complete the job his father failed to 12 years ago -- would doom his tax-cutting strategy, even if it was working.
The current slide in the Dow demonstrates this vividly. For investors are not warriors and businessmen are not empire builders. They look for reliability and predictability in international relations to allow them to conduct their affairs. And they loathe the costs, burdens, destruction and above all, sheer, messy uncertainties of war like the plague. And now they are expressing that loathing in the most direct and obvious way they possibly can, by fleeing the uncertainties of the market place.
Back on Sept. 20, we predicted this development very clearly in UPI Analysis and noted that the warmongering passions of Bush and his favored advisors flew in the face 134 years of Republican national policymaking since the days of President Ulysses S. Grant.
We then observed: "America historically has always prospered by staying out of wars -- especially big ones -- as long as possible, rather than going charging into them as fast as it can. Judging by the rhetoric from Bush, Defense Secretary Donald Rumsfeld and Deputy Defense Secretary Paul Wolfowitz, this elementary truth, so well understood by previous great Republican Presidents such as Ulysses S. Grant, Warren G. Harding, Dwight D. Eisenhower and Ronald Reagan, does not appear to be understood at all by this one."
We stand by that assessment today.
Adding to the looming woes of the U.S. economy is the soaring price of oil, now around $40 a barrel -- exactly as our Chief Economics Correspondent Ian Campbell predicted last summer would happen if war with Iraq became imminent.
Now, even if the war with Iraq were to go amazingly well and Iraqi President Saddam Hussein either refrain or fail to carry out his threat of torching his own country's major oil fields, these high energy prices look unlikely to drop over the next six months. Because given the rate with which fluctuations in energy costs and availability work themselves through the international supply system to your local gas pump, the current high prices mean that the economic damage going to be done by them is already in the pipeline -- so to speak -- and therefore unavoidable.
Therefore even if the war goes amazingly well, as its architects in the White House and the Department of Defense have for so long assumed, economic recovery and the benefits of plunging energy costs may be quite far down the
But, of course, the war may not go smoothly according to timetable. The 1991 Gulf War did. But wars seldom do. Vietnam, for example certainly did not -- at least not from the U.S. point of view. Therefore, if the war is long drawn out, and its costs soar even above the colossal $200 billion being widely and seriously estimated, the inflationary pressures on a Texan president as determined as his Vietnam-era predecessor Lyndon Johnson was not to raise taxes to balance the budget are likely to prove at least as inflationary as LBJ's martial spending sprees did.
But of course, the inflationary dragon likely to be unleashed by the failure to bite the bullet and raise federal government expenditures to pay for the enormous costs of the Iraq war policy -- and many other things -- will not be comparable to the inflationary horrors of the 1970s. It will be far, far worse.
This is because of the second key Bush policy obsession -- slashing taxes even while multiplying spending commitments to an unprecedented degree.
As Paul Krugman noted in The New York Times Tuesday, two years ago the Congressional Budget Office projected a combined total federal budgetary surplus of $5.6 trillion for the next decade. Now it has revised that to an accumulated deficit over the same period of time of $1.8 trillion.
None of this can be blamed, as Bush and his acolytes have shamelessly and skillfully blamed so much, on the prior policies of Clinton. This entire catastrophic fiscal reversal, dwarfing even Johnson's Big Spending debauchery of four decades ago, has come on the current president's watch and as a direct result of his policies.
Back on Aug. 8, we noted in UPI Analysis, "We did not expect the Dow Rally of the last two weeks to last and, unfortunately, we were right. We will not dare to predict when it will next drop below 8,000, nor rule out other
rallies above that benchmark figure again. . But we note that the rally was short lived. And we further note that such exuberant, desperate rallies and upward as well as downward short-term market volatility were the marks of Wall Street in the weeks after the Great Crash of 1929. But they never lasted, and the overall trend was down, down, down." It still is.
On Sept. 20, we were quite clear about what must be done. "The president and his advisers must awake from their dream that their Sacred Tax Cut, reckless deficit spending and even more manipulation of the interest rate mechanism alone will carry them through. They will not. And if these policies continue, it will be far, far worse before it gets any better."
Now, it is indeed getting worse. And the uncertainties and chaos of a far-from-sure-thing war with Iraq have been added to the witches' brew.
Ignore the Wall Street Boosters and the tame chorus of administration soothsayers. Enjoy your St. Patrick's Day. Drink your green beer. But also remember the time-tested wisdom of the Prophet Dylan. A hard rain is indeed