Saturday , September 18 2021

Biden’s Saigon moment raises ‘risks’ for markets

It has been 20 years. Like most of us who were in Manhattan on September 11, 2001, I find it difficult not to think of that day’s events at the best of times. The focus on the 9/11 terrorist attacks over the 20th anniversary this weekend was close to intolerable. However, the topic can’t be avoided, even for people who are interested in finance. And it has gained urgency with the landmark coming just as the US had pulled out of Afghanistan, ending the war it started as a direct consequence of 9/11. That withdrawal, appallingly handled, was accompanied by images painfully reminiscent both of the fall of Saigon in 1975 and (when young Afghans attempted to grip the side of an American transporter and fell to their deaths) of the figures who threw themselves from the towers 20 years ago.
So let us discuss the long-running impact of 9/11 and other major historic events on markets and the economy, and try to understand the impact of the humiliating American abandonment of Afghanistan.
To be clear, I like most readers find the impact of these events on dollars and cents unimportant compared to many of their other effects. But the financial consequences are still important, and profound.
It’s in the nature of historical turning points that there aren’t many. We have a small sample size. But we can draw some conclusions from the impact of the two most important historical events of my lifetime — 9/11, and the fall of the Berlin Wall, which oddly enough happened on November 9, the inverse of 9/11, in 1989. 11/9 ushered in what was dubbed the “end of history” at the time; 9/11 signalled the beginning of the US war on terror. Both came as great surprises, and were accompanied by some of the most memorable and compelling images in human history — the fall of the wall, and then the fall of the towers.
Oddly enough, the economic and market impact does have some similarities. After 11/9, nothing greatly changed for a while, stocks and the US economy kept on growing at much the same rate — and then after five years, markets famously went ballistic.
After 9/11, the response was the inverse. A very negative market reaction was swiftly canceled out by determined fiscal and monetary stimulus. Then the S&P 500 lapsed into the last stage of its post-dot-com bear market, and its recovery was interrupted by the global financial crisis. In real terms, the S&P fell almost 10% in the decade after 9/11. GDP over that decade grew by just over 20% — barely half the increase in the 10 years after 11/9.
Naturally, many other things interposed to create the melt-up of the late 1990s, and the crises that hit a decade later. But neither decade would have been the same without 11/9 and 9/11.
Both events contributed to the later financial ructions. Still, neither led to anything particularly dramatic in the shortest term. This wasn’t because traders couldn’t tell that something historic was afoot, but because it wasn’t clear how those events would play out. With big shocks come great uncertainty.
The sense of triumph that the Cold War was really over took over in a big way by the end of the 1990s. Within Europe, it also led to the reunification of Germany, which was carried out on terms so generous to former East Germans as to spark a dose of inflation and then a slump, putting the EU’s central economy out of kilter with the periphery for a generation. It also led to the euro, and the abandonment of the deutschmark, as this was the political price demanded by France for reunification of its powerful neighbour. London’s rise as a financial center was aided by the rush to invest in eastern Europe; and the mistakes in opening the former Soviet Union led to the Russian default of the summer of 1998, the meltdown of the Long-Term Capital Management hedge fund, and the Federal Reserve’s disastrous decision to pump in extra money and lower interest rates at a time when markets already looked infeasibly high.
None of this was inevitable because the Berlin Wall fell. But none of it would have happened without 11/9. The one certainty when young Germans rejoiced as they hacked the wall to pieces was that things would never be the same.
The same was true of 9/11. It would be absurd to say that the disaster was the cause of the GFC. But the lower interest rates in its wake helped to juice an already overheated property market. Both these events roiled the world with persistent uncertainty.
Plainly, the interminable US war in Afghanistan is nowhere near as important as 9/11 and 11/9. It long since became obvious that it was a failure. The ascendancy of the Taliban
increases geopolitical uncertainty a bit, but not by much; the Afghan economy is globally insignificant and nobody was relying on political stability there.
To summarise, the Mosul moment proved a terrifying flash in the pan, and had little broader impact. IS was defeated within a few years. Saigon was the last and most painful debacle of a war that had already been abandoned as a hopeless misadventure. The travails of the 1970s would continue, but the Saigon disaster didn’t stop ultimate US success in the Cold War less than a generation later.
For Saigon, the greatest impact was domestic. Gerald Ford lost his re-election bid the following year, although he had many other factors working against him, and came close to pulling off a victory. The Iranian hostage crisis inflicted a similar
fate on Jimmy Carter four years later.


John Authers is a senior editor for markets. Before Bloomberg, he spent 29 years with the Financial Times, where he was head of the Lex Column and chief markets commentator. He is the author of “The Fearful Rise of
Markets” and other books

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