A Day Drawing Circles
Jude Wanniski
January 5, 2001


I spent a day in Washington, D.C. drawing circles, trying to explain the monetary deflation to several people who may have some influence on policy in the new administration. I told them the financial markets and the economy are being dragged down by a monetary deflation. Unless this is fixed, it will be a constant drag on the Bush/Cheney administration for the next four years. It cannot be solved by cutting interest rates, only by raising the price of gold by Federal Reserve injections of liquidity into the banking system. That is, the Fed has to inflate. The circles I drew here and there around town represented the stock market -- which in turn anticipates the health of the economy. Think of the circle as a balloon being dragged down by an arrow pointed down to the price of gold, which is now at $265, where its average price over the last decade was $350. I drew three little arrows pointing up -- one toward tax cuts, one to interest rate cuts, one to regulatory relief. Think of these as birds trying to pull the balloon up while the arrow is a lead weight pulling it down.

I explained that the gold price -- over time -- determines the general price level. When it was at $35 per ounce in 1950, a suburban tract home sold for $10,000. When it went to $350, the same tract home sold for $100,000. The average gold price over the last decade is $350. If prices have to adjust to $265, the adjustment will require a series of declines in corporate earnings, bankruptcies, layoffs, unemployment, until the whole economy is adjusted to the lower gold price. Unless the problem is fixed, it will drag the administration down with it.

How to fix it, they asked? Most quickly by a Bush executive order, instructing Treasury to stabilize the dollar value of international gold reserves (in Fort Knox) at perhaps $300 or $320. I agreed this would not be as easy as it sounds because it would upset a lot of economists who prefer a floating currency, including all those who advise Mr. Bush. But it will have to be done sooner or later or the new President will be a one-termer. Greenspan may not want to admit it, but he understands the issue, I think, and would cooperate if he were approached by folks who came to terms with its implications. I hoped those who grasped what I was talking about would bring the concept to the new Treasury Secretary, Paul O'Neill, who is preparing for his confirmation hearings. (Contrary to what news reports suggest, O'Neill has not even begun interviewing people for subcabinet posts.) What was the response? All I can say is nobody laughed. I got a respectful hearing from several people I've known for a long time, but could not tell how much they bought, as there is virtually no discussion of gold in political circles. The fact that Wall Street gave back some of its gains yesterday (and much more today) may have them wondering if I'm right when I say the relatively small birds trying to pull the balloon up are not going to do it. Not little cuts in the fed funds rate nor nibbles at marginal tax rates.

P.S. Bad News. We had hoped Rep. Phil Crane of Illinois would become chairman of House Ways & Means and Rep. Marge Roukema would become chair of House Banking -- both being true Reaganauts. And they had the seniority. In its usual wisdom, though, the GOP leadership dumped them, with Rep. Bill Thomas of California getting Ways&Means and Rep. Mike Oxley of Ohio getting Financial Services, which replaces Banking. I've not met Thomas, but by all accounts he is said to be an itch and no Reaganaut supply-sider. He campaigned with heavy-hand for the job while Crane did not. The NYT even reported that Thomas gets along great with ranking Democrat Charlie Rangel while Crane does not. The exact opposite is the case. Murphy's Law rolls on. --JW  )