As usual, Margaret Thatcher had it right. On her recent U.N. visit, she stated Western aims in the Gulf: not just unconditional Iraqi withdrawal from Kuwait, but reparations for the devastation and punishment for the criminals who ordered the invasion.

Thatcher's point is that this is more than just a fight for cheap oil. It is also a fight for a principle: aggression doesn't pay, and, worse, it gets punished. If that lesson is delivered early, the post-Cold War era could turn into a long era of peace.

George Bush had been struggling for weeks to make this principled case. Then Monday at the U.N. he seriously undermined it with a vacillating offer of a "diplomatic" Gulf solution. "In the aftermath of Iraq's unconditional departure from Kuwait," he declared, "I truly believe there may be opportunities for Iraq and Kuwait to settle their differences."

What can this possibly mean? Before Aug. 2, Kuwait tried desperately to settle its differences with Iraq by negotiation. Iraq answered with invasion. Bush's gesture can only be a signal to Iraq that after withdrawal it can return to demands for the Rumaila oil fields, Bubiyan Island, a chunk of the Kuwaiti treasury and a say in Kuwait's government.

But surely after its aggression, Iraq can have no more claims against Kuwait than Germany can have against the Sudetenland. On the contrary. Kuwait now has serious claims against Iraq. Otherwise, how have we deterred the next thug from invading, withdrawing from, then negotiating with his neighbor?

Bush went on to offer Saddam another reward for good behavior. Iraqi withdrawal, he declared, would create the opportunity to settle the Arab-Israeli conflict. For two months Saddam had been trying to lend legitimacy to his seizure of Kuwait by linking it to Israel's occupation of the West Bank. For two months Bush had resisted the linkage. Now he is sending a signal to Saddam that playing his cards right could, with American assistance, make him a hero of Palestine.

The linkage between Iraq's occupation of Kuwait and Israel's occupation of the West Bank is fraudulent. The correct analogy is between the two victims of aggression, Kuwait in 1990 and Israel in 1967, both victims of war begun by powerful neighbors explicitly intent on wiping them off the map. The only difference is that Kuwait lost the war and is indeed being eradicated. Israel fought and won.

To compare the resulting unsought Israeli occupation of the West Bank to Iraq's deliberate and unprovoked seizure of Kuwait is pure cynicism. Saddam is engaged in systematically pillaging, depopulating and destroying Kuwait as a society. Israel controls the West Bank, but has left it socially, economically and culturally intact.

After his speech, President Bush denied that he was trying to create any linkage between the occupation of Kuwait and the Arab-Israeli dispute. There is, after all, something bizarre about suggesting that when one Moslem country swallows another, the Jews should be asked to pay the price. But surely the president is not so naive as to believe that his speech did not broadcast a signal to Baghdad: withdraw today, be rewarded tomorrow.

After all, what does a "diplomatic" solution mean if not a bargain in which both sides come out with something? Yet the whole premise of American policy has been that aggression cannot get any reward -- hence Thatcher's insistence on reparations and war crimes trials -- or it will be repeated. Is that not what Bush's vaunted post-Cold War order is about?

It is not good enough to say I didn't mean it. The administration also says it didn't mean the signals it sent to Saddam before the invasion. But they did their damage. The State Department, down to Ambassador April Glaspie, met Saddam's bullying with a sympathy and an acquiescence that could only be taken as encouragement. Saddam concluded, reasonably, that swallowing Kuwait would elicit no American response. An administration with such a sorry history of signal-sending should be more careful about creating linkages it later denies.

If this week's signal was wrong, the timing was worse. Just a week earlier, Soviet Foreign Minister Eduard Shevardnadze had delivered a stern warning to Saddam to get out of Kuwait or else. The Security Council had voted an air blockade. Under American direction, the world was closing in on Saddam.

Throughout the crisis all the players have taken their lead from the United States. Our message, up to then consistent, had been that Saddam had two choices -- withdrawal or war. It is an important message, because only if it is believed is there any chance that Saddam will choose withdrawal.

Now that Bush has wavered, others are following suit. Tuesday, the Saudi foreign minister delivered a speech at the U.N. that was one long linkage between Kuwait and Palestine. On the same day, the chief of the Soviet General Staff delivered a firm warning to the United States against contemplating war.

Wall Street got the message too. In two days after the president's speech, the price of oil fell $5.50 on rising hopes of a "diplomatic" solution.

Were they overreading the president? Hardly. In the Middle East all communication is by signal and code word. The Middle East is a semiotic minefield where a misplaced nuance can break a policy or bring down a government. This administration, we are told, is composed of big boys who know this well. If so, they should watch their language. If they don't mean what they say, they shouldn't say it.