Gold at $260 Jude Wanniski February 9, 2001

The introduction of the Bush tax program and the enthusiasm among Republicans and many Democrats for adding capgains tax cuts and the expanded Roth IRA's should have us cheering. But we are beaten down along with Wall Street the monetary deflation that -- as we predicted -- is actually worsening BECAUSE of the good news on the fiscal front. As prospects improve for a tax structure more favorable to increased risk-taking, capital formation, and productivity increases, the economic system is crying out for more liquidity. Yes, the Fed is supplying it in dribs and drabs, but not enough to decrease the scarcity of dollars relative to gold. In fact, gold finally moved off its $265 perch today with all these favorable fiscal winds and broke to $259. I'd mentioned in our client conference call Wednesday, with gold at $263, that it was now pushing in that direction. I'm still having a difficult time finding Wall Streeters, politicians, or even fellow supply-siders who buy our well-ripened deflation thesis, but the efficient markets are adding it up and marking nominal dollar prices down, both blue chips and just chips.

We continue to hope our friends are right and we are wrong, and the all-seeing markets will come to their senses and realize how nice it is to have interest rates and tax rates coming down at the same time. How good can it get? But if we are right and our friends wrong, the deflation termites will continue eating away at the equity markets and those pieces of the economy that are most vulnerable to the adjustment process. My biggest worry remains the fact that the only intellectuals who should understand what is going on are the supply-siders, but they continue to pooh-pooh the falling gold price while they celebrate the coming tax cuts. Many of our clients are members of Wall Street's "Club for Growth," whose chief economist, Steve Moore, never thinks about monetary policy except to urge lower interest rates. It is the Greenspan effect. Treasury Secretary Paul O'Neill has been singing all the right notes in the tax-cut script that Alan Greenspan has now approved, but the Bush administration has practically announced that even a discussion of monetary policy is out of its hands. Meanwhile, the wires today tell us Bill Poole of the St. Louis Fed thinks the economy is doing just fine. Poole and the St. Louis Fed still burn incense to the Monetarist gods. How does he know the economy is doing fine? Because M-2 is growing. It never occurs to him that in a monetary deflation, holding cash is a wonderful investment because it increases in value and you never have to pay a capital gain on its appreciation. So M-2 grows, under all those mattresses. Layoffs are at record highs, yet jobs are being created with lower nominal wages that pay in heavier, deflated dollars. This is the adjustment process.

We had our fingers crossed yesterday when former Fed Governor Wayne Angell, now chief economist at Bear Stearns, testified before the Senate Budget Committee on the state of the economy. Angell bravely announced that he is a "supply-sider" and proceeded to make a variety of arguments for the Bush tax cuts, the best of which is that economic growth in and of itself pushes the taxpaying class into higher brackets which erode incentives. I'd hoped he would cite the gold price as evidence of a deflationary drag, if only for the record, so when the tax cuts are enacted and the economy continues to slide, he would be able to harken back to the gold citation. The demonization of gold is so complete that President Bush might find it easier to invite Saddam Hussein to a state dinner at the White House than to ask O'Neill to reset the dollar gold price at an appropriate level, somewhere, anywhere north of $300. (A wiseguy friend of mine asks whether anyone has checked Fort Knox to see if the gold is still there, since Bill and Hillary have left the White House.) Meanwhile, Bob Mundell, our Nobel Prizewinner, is roaming Asia, advocating a new currency bloc there, so Asia can protect itself against the bunglings of the Federal Reserve. We will see him at our client conference in Florida, March 1-4, and ask him if he has any ideas on how North America can protect itself from those bunglings. [P.S. You may enjoy our supply-side lesson today, on the difficulties of revolutions.]