November 9, 2001

Markets Ups and Downs Mirror Political Crises

By Franz Schurmann

It's time to break the old American taboo that markets and politics don't mix. In fact, the roller coaster gyrations of the market — bearish one day and bullish the next — offer the clearest signals that our two big crises, Afghanistan and the Holy Land, are now at critical turning points.

A week ago, investors, economists and the Arab media were predicting the return of the bulls to world markets. On Oct. 24, veteran economist for the powerful Deutsche Bank, Edward Yardeni, rejoiced, "From here on, it's up." A bull market would have been a crowning welcome for the World Trade Organization meeting in Qatar on Nov. 9, and a powerful boost for the much-afflicted Arab world.

Just days later, the talk had turned to global recession, if not worse. "The world faces the worst economic slump since 1973-75 — WTO expects economic growth falling to zero," announced the authoritative London-based and Saudi-financed Arabic language As-Sharq al-Ausat (ASAA) on October 26. "We are in a recession that could turn into a depression," the newspaper quoted David Ure, Chairman of the Board of Radianz, a new Reuters/Equant joint venture.

Why this sudden swerve from optimism to pessimism by the world's top financial wizards? Last summer, oil prices were jumping around, but there were no such boom-to-bust predictions. Then, as now, OPEC and its founding member, Saudi Arabia, were able to turn the oil tap higher or lower at will. What changed wasn't the flow of oil, but a deepening collapse in consumer confidence.

Before the tragic events of Sept. 11, consumer confidence was riding high. Predictions earlier this year were rampant about a big takeoff in the third quarter — some time between July 1 and September 30. After 9/11, that confidence vanished, replaced by the fear that "things would never be the same." Nowhere was that loss of faith more evident than in the disastrous situation in the airline industry. People are afraid to fly, global tourism is facing bankruptcy and airline stock values have plummeted.

We live in a capitalist world where money is more important than products. Products, be they goods or services, are real and can be measured. Money, by contrast, is now just electronic blips in computers that store trillions multiplied by trillions of similar blips. Money operates on trust, and that trust is rooted in popular psychology — the extent to which ordinary citizens believe their governments have the power to ensure their security. Thus, currencies like the dollar, the yen and the mark enjoy supreme trust.

The Swiss franc and Saudi Arabia's riyal are also trustworthy, but unlike the "big three," neither plays a major role in capital markets. However, Saudi Arabia has power of a scope that Switzerland doesn't. It alone controls a big part of the global oil and natural gas markets. And along with its OPEC partners, its control comes close to a monopoly.

Ever since vast Saudi oil reserves were discovered in 1937, America has recognized that Saudi Arabia is central to its national security and, increasingly, to the security of the world economy. For that reason, Washington has always sought good relations with the Saudi monarchy even though Saudi values are starkly different from America's.

Only once before now has the United States clashed with Saudi Arabia. On Oct. 19, 1973, after Egyptian forces crossed the Suez Canal and broke through the Israeli Bar Lev line, President Nixon — with the enthusiastic support of Congress — voted a huge airlift of weapons to Israel. On Oct. 20, Saudi Arabia, livid with rage, declared an oil boycott that quadrupled oil prices, plunging the world into the worst economic slump since 1932. Ten days later the war ended. But the breakdown of trust between the United States and Saudi Arabia took years to mend. The slump lasted until the first quarter of 1975.

We are now at a crossroads similar to that of Oct. 20, 1973. This time Saudi Arabia, through Saudi-born Osama bin Laden, is linked to the war against terrorism America is waging in Afghanistan. It is also linked to the Israeli-Palestinian war through its claim to a custodian role over Islam's third holy city, Jerusalem. In both wars, Saudi Arabia is on a collision course with U.S. policy. It wants Israel to give up every piece of Palestinian land it seized in the June 1967 war. In Afghanistan, it wants a solution that ends Osama bin Laden's threat to the Saudi monarchy and brings about a reconciliation between America and the Taliban.

Saudi Arabia will play a key role both in the WTO meeting in Qatar and in the OPEC meeting in Vienna that follows it. Oil prices have sunk so low that OPEC members are complaining. So far, the global economy has not gotten any push from cheap gasoline and natural gas. If OPEC votes for a hike in the price of oil, the bears will have gained the decisive edge over the bulls.

The coming two weeks will give the world a sense of whether the bears or the bulls will triumph — and that, in turn, will offer the best barometer of how the United States is faring in the war on terror and the war in the Holy Land. If the bulls edge out the bears, the world has a chance to get back to peace, prosperity and freedom, as we anticipated at the beginning of the year. If not, we shall be in for a recession at least as bad and as long as what happened in 1973-75.

Franz Schurmann is professor emeritus of history and sociology at UC Berkeley. His book "The Foreign Politics of Richard Nixon" (Institute of International Studies, UC Berkeley, 1987) sets forth the roots of the current crisis.

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