Fragile Money Markets Watch Iraq War With Unease

by Franz Schurmann

Global economists agree that if the Iraq war goes on for weeks, the price of oil and gold will spike and employment and the dollar's value will slide. Hardest hit will be the most advanced industrial countries, specifically the United States, Europe and Japan. Now, after a brief downward detour, oil prices are again rising.

Economists also agree that the 1991 Gulf War is not a good predictor of what's to come. Saudi Arabia played a key role in that war, which began on Jan. 16 and ended 42 days later. During that time, according to L'Espresso, the prices of gold and oil both dropped.

But this time the buildup to war has lasted several months, producing a lot of uncertainty in both minds and markets. And the uncertainty will likely not abate, regardless of who wins the "Battle of Baghdad."

One global economic indicator, the value of the U.S. dollar, seems to send clearer predictive messages than most others. On Thursday, March 13 the dollar rose to its highest level in 8 months vis-a-vis the euro and the yen. On March 14, the markets soared. The rising dollar and the bullish markets survived the beginning of the war on March 20. By March 25, the dollar was down, by a little. In effect, it fell back into its uncertainty syndrome, which had been going on since the war buildup began.

If the dollar's value rises, this points to peace. If it falls, it suggests war. And if it oscillates ambiguously it points to Chris Varvares' implicit worry that the entire global economy is in flux.

For the global market to operate smoothly, the dollar must be stable, reflecting strength in the world's solo superpower. On March 13, market operatives felt that at last some clouds of certainty were blowing away the thickening clouds from the Iraq crisis. But uncertainty returned with the unexpectedly strong Iraqi resistance to the Anglo American forces in southern Iraq and those moving on Baghdad.

The message sent out by the currency dealers to all parties to the Iraq War was crystal clear: Win, lose or draw, but end the war fast. If you don't, the global market will crash.

Unlike country-specific economic indicators like GDP or consumer confidence, the dollar and its junior partners, the euro and the yen, track movements in the global economy. Since the early 1970s, the American dollar has been the financial glue holding the global economy together. But if the dollar falls too fast it devalues the worth of its holdings. Then a rush to the euro and the yen could easily occur.

For years, some economists have been predicting that sooner or later a global economy dominated by only one currency would break down. They envisage a future realm of the dollar, another of the euro, and, less clearly, one of the yen.

If the 1991 Gulf War is not a good predictive indicator, an earlier war may serve better. In 1971, the United States was still militarily bogged down in Vietnam. But on the economic front a situation had arisen that was called the "Eurodollar crisis."

The Eurodollar was a dollar that did not come back home to the United States, because the Europeans bought fewer and fewer American products. The Vietnam War had drained off too much capital from the civilian sector to the military-industrial complex, and the Europeans were not crazy about buying hi-tech military weapons.

In January 1971, the United States launched an invasion into Laos from South Vietnam to cut the "Ho Chi Minh Trail" that was the lifeline of the Communist fighters in the South. Helicopters were a key to the plan. To Washington's dismay, the Russians supplied the stubborn North Vietnamese with thousands of shoulder-fired Strella rockets that halted the invasion in its tracks.

President Nixon thought that a successful outcome would have empowered him to tackle the Eurodollar crisis. Instead, he faced a lost war and a financial crisis. On July 15, 1971, Nixon announced he was going to visit America's archenemy at the time, Mao Zedong. That paved the way for ending the Vietnam War.

A month later, Nixon announced a "New Economic Policy" that broke the ironclad link between the dollar and gold, an act that created the modern global economy and freed up capital for the stunted American business sector. In 1972, Nixon won the presidential elections overwhelmingly.

Even if Gen. Tommy Franks wins the Battle of Baghdad, other war clouds are gathering from Kurdistan, Iran, sundry angered Arab states and maybe even from Russia, the second largest arms purveyor in the world. President Bush should take a look at the history of 1971, in which another president extricated the United States from a military and economic crisis, and won re-election as well.