USA was still in a malaise due to our defeat in the Vietnam War. We did not have confidence in our capabilities until Operation Desert Storm. Saddam probably thought that Bush 41, like Jimmy Carter, was all talk.
Either that, or he was stupid enough to believe that we meant what we said.
When April Glaspie told Iraq in 1990 that the US took no position on its border dispute with Kuwait, the Iraqis really thought that the US took no position on their border dispute with Kuwait.