Abu Ghraib and the Dow

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As an investor,
I look at politics as a major factor in altering the value of
capital. Taxation, deficit spending, the rate of monetary inflation,
and regulation all affect people’s assessment of the future value
of capital. That assessment affects the present value of capital.

If your money
is in the stock market, you would be wise to ask yourself this
question: "What if Kerry is elected, and both houses of Congress
return to the Democrats?" I think this scenario is increasingly
likely.

The Republican
majority in the Senate is nip and tuck already. The Republicans’
margin is too thin when one-third of the Senators are up for re-election.

Because Republicans
have controlled a majority of state legislatures since 2000, when
the new census figures came out, they have designed Congressional
districts to favor Republicans. The procedure is called Gerrymandering.
The legislatures draw the lines for Congressional districts so
that lots of Democrats wind up in a few districts. This siphons
off Democrats from districts in which there are small Republican
majorities. Those Democrats in the House whose districts have
been protected are happy with the outcome. Those who are unhappy
don’t have anything to say about it. So, it is much more difficult
to change the majority party in the House than in the Senate.
One estimate of swing districts is that there are as few as 30
out of 435. The Republicans enjoy a 229-205-1 advantage. It would
take a major political event to lose this majority.

The Democrats
may now have such an event. By its very nature, the Republicans
are not in a position to challenge the Democrats.

PHOTOS
ARE IRRESISTIBLE FOR THE MEDIA

The photos
of Abu Ghraib are now having a negative effect on public opinion
regarding the handling of the Iraq war. These photos have only
just begun to erode Republican support. There is a drip-drip-drip
effect over time. As more photos are released, Republican voters
get discouraged. Democrats, meanwhile, smell blood.

The polls
now indicate falling support for the war in Iraq. But the President
is running as a war candidate: war on terrorism, war in Iraq.
(Afghanistan is off the radar these days.) He is not going to
change course, no matter what happens. What protects him is the
fact that Kerry thinks we should send over more troops. Kerry
is avoiding Iraq like a hot potato. He is not making an issue
of the war. But his followers are.

Democrats
own the major newspapers. The
Left dominates the electronic media
. They will keep running
Abu Ghraib photos for as long as subscriptions aren’t hurt or
Nielsen ratings don’t fall. The public may say, "We’re tired
of those photos," but readers and viewers seem insatiable
for more. It’s a scandal, and scandal sells newspapers and raises
ratings. The network that doesn’t run the latest photos will lose
market share.

This is what
the political game is all about. From the looks of things, this
summer is going to be filled with stories about the Iraq prison
scandals.

DECEIVING
CONGRESS

By keeping
Congress in the dark about Abu Ghraib until the photos ran on
"60 Minutes II," Donald Rumsfeld made a huge tactical
mistake. Congress usually defends its turf from the Executive,
and being pushed out of the loop really makes Representatives
and Senators angry. They were caught flat-footed back home by
the scandal and made to look like afterthoughts in the process
of governing.

This is one
reason why Congressional Republicans are not going to put a lid
on the prison scandal story. They know that the folks back home
are embarrassed by it as Americans. This is an election year.
To play footsie with Rumsfeld, and therefore indirectly with the
President, on the prisoner abuse issue will seem partisan. On
anything perceived as a moral issue, being seen as partisan will
backfire. The hearings will continue. Anyone who says, "Don’t
you know there’s a war on?" will suffer at the polls.

In an election
year, incumbent Republicans want to protect themselves from their
opponents. If the photos start affecting their poll numbers back
home, which seems likely, they must find a way to position themselves
as defenders of justice in Iraq. Rumsfeld has handed them a golden
opportunity to assert their independence. He hid the truth from
them until the scandal broke on TV. If there is one thing that
politicians don’t like, it is to be blind-sided by the Executive’s
unsuccessful attempt to keep the lid on a scandal that can affect
their careers. This is why Congressional Republicans are not forming
a protective circle around the Administration.

MORE
BAD NEWS

The Pentagon
now admits that 37 people have died in Afghan and Iraqi prisons.
So far, there are no photos, but Congress will probably have to
hold hearings. The story is getting publicity all over the world.
It is a foreign policy issue. Here
is the Associated Press account, run on CNN.

WASHINGTON
(AP) — The U.S. Army has investigated the deaths of 37
prisoners held by U.S. forces in Iraq and Afghanistan since
August 2002, Pentagon officials revealed Friday.

Among the
prisoner deaths, nine are still being investigated as possible
homicides, eight by the military and at least one by the Justice
Department because it apparently involved only CIA personnel.

In a 10th
case, a soldier was punished and dismissed from the Army for
using excessive force after shooting to death a man in Iraq
who was throwing rocks at him in September 2003.

The rest
are attributed to natural causes or considered justifiable homicides,
in which a soldier had reason to use deadly force on a dangerously
violent prisoner, officials said. Eight deaths, in four incidents
in Iraq, were considered justified.

Even as
the investigation into the abuse and humiliation of prisoners
in Iraq goes forward, similar criminal inquiries are under way
into the circumstances of prisoners who died. . . .

Also, for
the first time Friday, the Justice Department acknowledged that
it has opened a criminal investigation into allegations of prisoner
abuse in Iraq. Justice spokesman Mark Corallo said the probe
involved an unidentified civilian contractor working for the
Defense Department. It was unclear if the case being investigated
by the Justice Department involved a death. . . .

No further
details were provided. The Justice Department has also received
at least three referrals for possible prosecution from the CIA
related to prisoner abuse allegations, but has not announced
a full criminal investigation into those cases.

Whitman,
the Pentagon spokesman, said records are still being examined,
and that the number of cases could rise.

Because these
cases go back two years, it becomes clear that the Pentagon, like
any bureaucracy, put the lid on these stories. It no longer can.
The original assumption that Abu Ghraib’s incidents were not representative
now appears to be wishful thinking. There have been no deaths
reported from that first batch of photos. The new reports indicate
far more serious matters.

HEARINGS
PROVIDE LOTS OF NEWS BITES

There will
be hearings. I think they will go on all summer. Every military-related
Congressional or Senate Committee will want to get in on the act.
Every elected official will want to offer his two-cents’ worth
for the folks back home to see on TV. These people are politicians.
They want air time. They want to be perceived as decision-makers.
There is nothing like a scandal in the Executive to get their
juices flowing.

Something
else: politicians in both parties supported both wars. As the
war in Iraq has gone badly, and now threatens to get much worse
this summer, Congressmen and Senators are looking for ways to
get the "rubber stamp" image out of their political
lives. The prison scandals are perfect for this. Every politician
can position himself as a critic of the Administration’s handling
of this aspect of the war. This, no one voted for.

But it goes
beyond politics. Americans want to see this war as a force for
good in the world. The prison abuse scandal is now undermining
Americans’ self-image. It makes them look bad. It makes the country
look bad.

On "60
Minutes," the normally curmudgeonly Andy Rooney pulled off
the kid gloves on Sunday night. He is a World War II vet, and
shares the intense patriotism of that generation — my father’s
generation. I have never seen him this angry. The segment was
called "Our Darkest Days
Are Here
."

The day
the world learned that American soldiers had tortured Iraqi
prisoners belongs high on the list of worst things that ever
happened to our country. It’s a black mark that will be in the
history books in a hundred languages for as long as there are
history books. I hate to think of it.

The image
of one bad young woman with a naked man on a leash did more
to damage America’s reputation than all the good things we’ve
done over the years ever helped our reputation. . . .

Where were
your officers? If someone told you to do it, tell us who told
you. If your officers were told — we should know who told
them.

One general
said our guards were "untrained." Well, untrained
at what? Being human beings? Did the man who chopped off Nicholas
Berg’s head do it because he was untrained?

The guards
who tortured prisoners are faced with a year in prison. Well,
great. A year for destroying our reputation as decent people.
. . .

In the
history of the world, several great civilizations that seemed
immortal have deteriorated and died. I don’t want to seem dramatic
tonight, but I’ve lived a long while, and for the first time
in my life, I have this faint, faraway fear that it could happen
to us here in America as it happened to the Greek and Roman
civilizations.

Too many
Americans don’t understand what we have here, or how to keep
it. I worry for my grandchildren, my great-grandchildren. I
want them to have what I’ve had, and I sense it slipping away.

Here is his
lament: "A year for destroying our reputation as decent people."
This crime, he takes personally as an American. I don’t think
he was faking it. At age 85, he is too old to bother to fake it,
except to get a few laughs. He was not going for laughs this time.

I phoned
my father to get his assessment. He is in a unique position to
offer one. In World War II, he was in the military police, stationed
in Egypt. In his post-war career, he was an FBI agent. Very few
men had a dual career like this. I asked him if he had heard of
anything like Abu Ghraib. He said no. "It’s unbelievable,
except that it looks like it happened." His overall assessment:
“Those guards are beasts.” I have not heard him speak of anyone
like this. He is irate. I think a lot of retired military vets
are equally irate. This event reflects badly on them, and they
resent it.

There is
a sense of betrayal out there. I don’t think the mass of voters
will blame the President, but the Republican faithful will suffer
attrition in their ranks because embarrassed Republicans will
stay home in November.

My pastor,
an Army chaplain for a decade, said Sunday, "I am tired of
seeing these photos." He also compared what went on in Abu
Ghraib with tyranny. He does not often comment from the pulpit
on politics. He does not see this event as politics. But it will
have political ramifications.

This election is now Kerry’s to lose. Kerry need only sit tight
and say nothing specific. This is what he is doing. A site devoted
to monitoring political stories in the media, Media
Tenor, reported on May 24:

The latest
report from Media Tenor, an independent institute examining
the presidential election media coverage, shows that in the
last week, 60% of all reports on George W. Bush’s performance
both in polls and in the election horse race were negative.
The networks’ extensive coverage of recent poll results creates
an added challenge for Bush’s campaign. Horse race and poll
coverage have a potentially larger impact than other news coverage,
as a bandwagon-effect often sways public opinion, engendering
further swings in voter-preference.

Meanwhile,
John Kerry’s presence on the evening news would be negligible
if not for his campaign efforts and political advertising. Almost
half of Kerry’s coverage consisted of news on his campaign efforts
and appearances. The only actual policy-related issue Kerry
had any say on in the news in mid-May was foreign policy. His
statements on foreign policy, however, were eclipsed by the
president’s, which outnumbered Kerry’s six to one.

Network reports
on Rumsfeld actually exceeded reports on Kerry in the week of
May 17-20. I contend that this is good news for Kerry.

TV coverage
on Bush was 5 to 1 against him (report, p. 10). This comes as
no surprise. The only "good" news is that there has
been a decline of bad news coverage (p. 11).

In a campaign
in which the headlines and photos are turning the voters against
the incumbent, the challenger need only have name identification.

THE
GENERALS CHIME IN

The public
was not told how many senior military officers opposed the Administration’s
war plans. Now, these high-ranking officers — retired —
are coming in front of the cameras to tell the story of how civilian
political operatives, generally called neo-conservatives or neo-cons,
underestimated the number of troops needed in Iraq and dismissed
senior officers’ estimates as far too large. There are turf issues
here, but it goes beyond turf.

Ronald Reagan’s
appointee to head the National Security Agency, Lt. Gen. William
Odom, has been the loudest of the critics. On
April 29, he appeared on "The Today Show." This interview
took place before the scandal broke.

The question
is, whether you can bring together a political situation in
Iraq that’s going to be stable and will be pro-US. I don’t think
an effective Iraqi leader can gain wide support there if he
is pro-US. And I don’t think we can expect a liberal democracy
to be brought about any time soon. Therefore, if we are getting
into a long term commitment, it just doesn’t make sense for
us. I think our military strategy and the use of military force
is becoming unhinged from our political strategy not only for
Iraq, but for the larger region, and also for fighting what
in my view is a far more important campaign, and that’s against
al-Qaeda. We have diverted our forces enormously from al-Qaeda.
Things don’t look all that good in Afghanistan. . . .

Then furthermore,
in no Arab state has there been any tradition of constitutional
regime that could be properly called a successful liberal democracy.
We do have one example of a Muslim society with a liberal democracy,
which still has trouble, and that’s Turkey. But that took…
40 or 50 years… .So to expect that we’re going to have a liberal
democratic regime that’s pro-Western in Iraq any time soon,
one can never say it won’t happen, but it would defy all odds
of anything we know about how liberal regimes come about.

We have
already failed. Staying in longer makes us fail worse. If we
were a small power, we might have to worry about our so-called
credibility. I don’t think that’s the issue. The issue is how
effective we were going to use our power. The longer we st…
if we blindly say we should stick to it, we’re misusing our
power and we’re making it worse. Let me put it more bluntly.
Let’s suppose you murdered somebody, and you suddenly look and
say, u2018We can’t afford to have murdered this person, so therefore
let’s save him.’ I think we’ve passed the chances to not fail.
And now we are in a situation where we have to limit the damage.
And the issue is just how much we are going to pay before we
decide to limit the damage, not rescue ourselves by throwing
good money after bad.

Retired Marine
Corps 4-star general Anthony Zinni appeared on Sunday night on
"60 Minutes." Zinni in 1997—2000 served as Commander-in-Chief
of the Central Command, which encompasses the Middle East. Here
is his assessment.

"There
has been poor strategic thinking in this. There has been poor
operational planning and execution on the ground. And to think
that we are going to u2018stay the course,’ the course is headed
over Niagara Falls. I think it’s time to change course a little
bit, or at least hold somebody responsible for putting you on
this course. Because it’s been a failure." . . .

"In
the lead up to the Iraq war and its later conduct, I saw at
a minimum, true dereliction, negligence and irresponsibility,
at worse, lying, incompetence and corruption."

"I
think there was dereliction in insufficient forces being put
on the ground and fully understanding the military dimensions
of the plan. I think there was dereliction in lack of planning.
. . . The president is owed the finest strategic thinking. He
is owed the finest operational planning. He is owed the finest
tactical execution on the ground. . . . He got the latter. He
didn’t get the first two." . . .

Zinni
in a previous interview said
that he has been accused of being
a traitor and a turncoat.

That Zinni’s
critics would make such an accusation against a 4-star Marine
general indicates that the critics are desperate to keep the lid
on public criticism of the war, even by senior military men. But
this strategy is hopeless in the face of the photos from Abu Ghraib.

The toothpaste
is out of the tube. It’s also on the tube . . . and the front
pages.

CONCLUSION

If the Democrats
sweep Congress, Bush’s tax cuts will not be rolled over. They
will be repealed. We can expect higher taxes. As for the national
deficit, there is not much hope. If Kerry pulls our troops out
of Iraq, which is doubtful if his words mean anything, Federal
spending will not drop. The Democrats will take the money allocated
for war and spend it on welfare projects inside the U.S. It is
surely not the policy of Congress to cut spending.

So, the war
has ratcheted up government spending. Spending will not be cut.
Taxes will be raised if Kerry wins. All of this is bad news for
stocks.

Predicting
the outcome of an election when the candidates are in a dead heat
is a high-risk business. But, as investors, we have to make forecasts.
I think Kerry will win and the Senate will go back to the Democrats.
I have not made up my mind about the House, but I think the news
from Iraq will be bad enough, and constant enough, to erode support
by Republicans. Enough of them will stay home in November to lose
the swing districts in Congress.

If the Republicans
can retain control of the House, the government will go into gridlock.
Gridlock is about the best any voter can hope for these days.
It keeps the Federal government from growing faster than normal,
as it has since 2001. But if there is a clean sweep by the Democrats,
it will be bad for the stock market.

The market’s
discounting process will start rolling before summer is over.
My advice: avoid the rush.

May
26, 2004

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.freebooks.com.
For a free subscription to Gary North’s newsletter on gold, click
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