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March 28, 2003
The ever-so-slightly premature victory party in the financial markets is running in reverse. The 10-year T-note yield is down to 3.89 from 4.11, and mortgages are back in the high fives, down from six-plus. For one, shining moment, the stock market had a gain for 2003... no longer.
The week's economic data were weak, but from February, which we knew to have been shaky. Orders for durable goods fell 1.2%; sales of new homes dropped 8.1% and of existing ones, 4.3%, both blamed on bad weather; and weekly claims for unemployment insurance are still above 400,000, though trending down.
Next week we will have to interrupt the war for economic news from March. Tuesday will bring the purchasing managers' report for March, and Friday we'll get the March payroll data from the Labor Department. I cannot imagine that either report will be good news, but the expectation of poor news is the reason interest rates are as low as they are. Truly lousy data would knock mortgages below 5.75%.
The economic scene is surreal: a strong second half of '03 is the forecast from the same characters who saw strength for the second half of '01 and '02; the Fed is in its invisibility act; and Mr. Bush's newest tax cuts are falling apart on Capitol Hill.
Then there's the war. Its financial consequences are hard to handicap beyond the obvious: bad news pushes money to safety, hence interest rates down, and good news produces at least an interval of relief.
It's early yet, but there are preliminary conclusions to be drawn, and evident good-news, bad-news probabilities.
The toughest observation: since last August, in regards to Iraq, the Bush administration's view of the world has repeatedly failed in contact with reality. In the diplomatic phase, we thought we were building a meaningful coalition, but crucial Gulf War I partners would not participate. We thought the French and Germans were in some delusional phase, and would come around; then we thought that they were isolating themselves; finally we became the isolated party, going to war without the bases and ports of even Saudi Arabia and Turkey.
Civilians in the administration insist that the war is going "according to plan," though it transparently is not, except that we still plan to remove Saddam Hussein, and will ultimately do so. As a military stratagem, "shock and awe" did not survive its first week, and has passed into military lexicon alongside "pacification" and "Vietnamization." Air power finally won a war alone against Serbia, but smart weapons are not yet a death ray, helicopters are not flying tanks, and zoomies won't win a street fight, which this is turning into.
General Barry McCaffery (ret.), whose 24th Division led the left hook in Gulf I, is hammering at the Rumsfeld light-force plan, exposing its scandalous error; and the ground force commander in Iraq (V Corps), Gen. Wallace, yesterday bluntly described the war plan's underestimation of the degree of Iraqi resistance, and the extent of Saddam's control. Our troops are fifty miles from Baghdad, but appear stalled, forced to wait for adequate heavy troops to arrive.
The cliché is true: no war plan survives the first shot. However, the surprises should be divided between good ones and bad ones. Like the diplomatic effort, Rumsfeld's plan has thus far not enjoyed a single positive surprise.
We will win the tactical victory: we will remove Saddam, his barbaric regime, and his weapons. Maybe we will get lucky, and avoid the house-to-house part. However, the strategic victory -- improved conditions in hearts and minds in the Middle East -- seems to me more remote than it was before we began this venture last August, and growing more so with every day of delay in the military campaign.
This situation is not conducive to improved economic growth, here or anywhere.
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