Can the Economy Survive the Attacks?
The destruction of the World Trade Center may be the 21st century’s first major historical turning point. It’s possible, even probable, that the events of Sept. 11, 2001, signaled watersheds in the global economy, finance, politics and U.S. involvement in war. If so, Americans cannot persist in assessing today’s challenges through the rear-view mirrors of Pearl Harbor and Operation Desert Storm.
Apart from sneak attacks and the ineptness of U.S. intelligence gathering, the circumstances of Dec. 7, 1941, and those of last Tuesday have little in common. In 1941, the Depression was winding down; the Dow Jones industrial average was not too far above its Great Depression lows. The United States was an emerging great power ready for the big time, but not quite there.
Psychological mobilization was easy and obvious. The attackers at Pearl Harbor wore Japanese national insignia. The war that followed was declared. Control of government in Washington was undivided party-wise, and Franklin D. Roosevelt was a strong president. Sixty years later, 1941-1945 is a period now remembered as the launching pad for U.S. global economic and political supremacy. This has made Pearl Harbor a symbol of success, not embarrassment.
The underlying circumstances of 2001 are quite different. The economy is at the tail end of an 18-year bull market and shadowed by both a global recession and a global bear market. National polls before last Tuesday’s terrorist attacks showed public nervousness and lack of confidence in Washington’s economic policies. That may even explain the scheduling of the attacks, especially if the terrorists were as shrewd in their timing as they were in their flight planning.
The full and successful retaliation promised by President Bush this past week will be difficult. The attackers wore no insignia; there is no nation against which to declare war or mobilize against, only an Afghanistan-based terrorist, Osama bin Laden, who may or may not be the principal culprit. It’s easy to imagine a five-, 10-or 20-year undeclared war, one that could hasten the decline of the United States as a leading economic power.
The possibility of a major economic watershed is real enough. The 1990s illusions of a New Economy liberated from recessions and business cycles collapsed many months ago. In the days before Tuesday’s attack, the press was full of stories about weakening U.S. consumer confidence and the rising possibility of simultaneous recessions in Asia, Europe and North America, which last occurred in the 1970s.
If such a downturn was developing then--official economic data in the second quarter, still subject to further revision, indicated near-recession--the events of Sept. 11 have probably increased the likelihood of one. This week’s mammoth slowdown in U.S. economic activity--in finance, travel and retail--may well push third-quarter statistics to recessionary levels. Moreover, already weakening consumer confidence is likely to tumble further as citizens, worried about their record debt and uncertain prospects, stop buying more things they don’t really need. If both consumer spending declines and an international recession emerges by October, there may be another milestone: a major global bear market in stocks and finance.
In some respects, we are already in it. At its twin-bottom hits in April and this month, the tech-heavy Nasdaq is down 67% from its peak in March 2000. Other U.S. and major foreign indexes have already fallen more than 20%, the traditional marker of a bear market. But the Nasdaq may be the pivot of the overall crisis because history’s three biggest previous bull markets--Britain’s South Sea bubble of 1720, the U.S. craze of the Roaring Twenties and the implosion of the Japanese stock and property bubble of the 1990s--also led to the biggest collapses. The ascent of the Nasdaq in the 1990s was equally manic and its descent similarly record-breaking.
This is big stuff. If the other leading stock indexes are heading toward a 30%-50% decline, instead of the 20%-30% slump seen so far, the financial crisis of 2000-2002 could easily mark a historical turning point. There is a caveat. Over the last two decades, the United States, in general, and the Federal Reserve, in particular, have taken the lead in rescuing banks and financial markets, almost no matter how careless their behavior, through bailouts, interest-rate cuts and money-supply floods. The Sept. 11 terrorist attacks give the Fed and other central banks a chance to wrap another liquidity surge in red, white and blue bunting. It could produce a temporary market uptick.
As for national politics, the stalemate put in place last November could be resolved in the 2004 elections. If we look at the major presidential cycles since the beginning of the republic, the clearest triggering circumstances are those of the last 150 years: the advent of the Civil War in 1860-61, the depression of 1893, the crash of 1929 and the confluence of urban riots, assassinations and Vietnam in 1965-68. Multiple events in 2000-2002 could bring about another electoral watershed in 2004, especially if a further collapse in financial assets and a global recession go hand-in-hand with the beginning of an undeclared terrorist war that makes the United States a battleground for the first time since 1861-65.
Americans certainly have every reason to take the attacks on the World Trade Center and the Pentagon as acts of war, and 80%-90% of them do, according to national polls. The problem is that the wrong type of war--a drawn-out contest with terrorists would meet that description--could be at least as detrimental as Vietnam to the United States. Authorities who focus on the precedents of Pearl Harbor and the Persian Gulf War risk ignoring more relevant precedents.
Since the 1600s, each of America’s three predecessors as leading world economic power found itself bled--economically, politically and military--by a new sort of war that forced it to fight on the wrong battlefields in precarious circumstances at too late a stage in the trajectory of its world leadership. Spain was crippled by the bloody and grotesque Thirty Years War of 1618-1648. The next power to rise up, the maritime empire of the Dutch, suffered a mortal economic and commercial wound in the quarter-century of war that wracked Europe from 1690 to 1713.
Great Britain paid the same price for World War I and II. Within only three decades of its peak economic and imperial splendors of 1910-14, the British empire of 1947, besides undergoing food and clothing rationing in peacetime, was forced to depend on financial loans and hand-outs from the United States.
If terrorists in dingy conference rooms in Tripoli, Damascus, Baghdad, Tehran or Kabul have concluded that the United States cannot maintain its present economic strength through 10 to 15 years of terrorism, attrition, computer-hack attacks, eroding markets and oil and currency crises, they may be wrong--but they may also be correct. Even in 1991, the United States had to pass the hat among other coalition members to finance the Gulf War.
Moreover, just as Britain no longer possessed the cutting-edge technologies in metallurgy, chemicals, armaments production and electrical engineering to effectively fight the First World War--imports from the U.S., Sweden and elsewhere become crucial--the United States is increasingly at risk in Internet and computer-age technologies. Recent reports have made it clear, for example, that as commercial relationships between Taiwan and mainland China accelerate, some of America’s dependence on Taiwan for critical computer parts threatens to pass to China.
None of this to say that the U.S. should not try to eliminate its terrorist attackers. To maintain domestic and international credibility, it has to. But the three-dimensional game of strategic chess now facing Washington is quite different from the ones American leaders have played before.
