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 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