Take It Easy
Jude Wanniski
March 17, 2004


There is every good reason for Fed Chairman Alan Greenspan to be spouting optimism about the economy and the job market. I have known him for 30 years, from his days at Townsend-Greenspan, and I have never seen him so cheerful, especially in the face of huge federal deficits. Yesterday’s< EM> New York Times< /EM> front-pager by Edmund Andrews, “Greenspan Shifts View on Deficits,” is an amazing account of how a 75-year-old man can change his basic beliefs of a lifetime. He is not worried about the current-account deficit, he is not worried about the Japanese buying up much of the U.S. budget deficit, he is not worried about American families taking on too much debt, he is not worried about the health and continuing expansion of the U.S. economy, he is not worried about inflation or deflation, and most emphatically does not want to raise taxes or roll back the Bush tax cuts. Yes, there are concerns about Social Security and Medicare, but as long as he and other opinion leaders lay out the essence of the demographic realities, solutions are readily at hand that would not be terribly onerous to anyone. Here are some random thoughts on why I am still optimistic at least about the year ahead:

TERRORISM: If you understand “political terrorism” to be primarily aimed at “delivering a political message,” as opposed to gaining wealth, you can see that last week’s bombings on Madrid’s commuter lines was so efficient in its purpose that it need not be delivered a second time. This was also my reading of 9-11, where my primary concern was that President Bush would not lash out at the Islamic world. The steep decline in the stock market was reversed when he put together a coalition that included Pakistan and other Islamic states before intervening in Afghanistan. The strike by al-Qaeda was of course designed to punish Spain’s government for its support of the Iraqi war when it ran counter to the clear anti-war sentiments of the Spanish people. This is not a message al-Qaeda has to deliver a second time. It is a setback for the Bush team, but an advance for the United Nations, which the Pentagon warhawks insisted was an irrelevance, getting in the way of their global designs. It is a necessary correction to that attitude, I think, and a positive development. There is always a chance of another strike of this magnitude hitting the U.S. homeland, but at the moment I would guess that would not happen anytime soon. An al-Qaeda strike here before the elections would not achieve any of its objectives.

FED POLICY: As long as the dollar/gold price behaves itself at $400 or so, there will be no reason for the Fed to raise the funds rate above 1%. At one time I had been persuaded that 1% would cause a continued rise in the gold price and revive inflation, but the market reaction to the Fed’s January statement that signaled a slight tightening of policy changed my thinking. There is nothing wrong with the yield curve as it presently exists, with the funds rate at its lowest since we were on a gold standard in the 1950’s. Think of the current condition as being a< EM> de facto< /EM> gold standard. Equities did fall off sharply with news that it was al-Qaeda that bombed Madrid, but the gold price only climbed a few dollars, not the big run-up after 9-11 that signaled deep fear that the attacks would be the first of many.

OIL: With oil pushing $38 a barrel when it should be closer to $26 in its “normal” relationship with gold the guessing remains how effective the OPEC countries will be in managing their production cutback announced for April 1. The higher the gold price, the more effective it would be. The lower the gold price, the less effective it would be in maintaining discipline, and non-OPEC countries would have a clear incentive to step up production for a stronger dollar. Remember there really is no shortage of oil in the world. Proven reserves are in excess of 1 trillion bbl. and “base reserves,” which represents the best guess at likely “undiscovered” oil, are somewhere over 3.5 trillion bbl. We are using 75 million bbl. a year, although the official estimators seem very unsure about demand in China and India, which is where the pressure on available supply is coming from. It has been reported that in Beijing alone, there are today 400,000 more cars and trucks in the streets than a year ago at this time, a 25% increase. Certainly, the higher price of oil is an incentive for people who use it everywhere to economize on it and an incentive for prospectors everywhere to find more of it where it can be converted to fuel. This tells me that the oil price will fall sooner than the gold price will rise, sometime this year. The positions will unwind when the conditions change. We think it is no big deal.

JAPAN’S DOLLAR RESERVES: If Greenspan is not worried about Japan buying dollars with yen to accumulate $700 billion in reserves, then we should not worry either. It is a good deal in Japan, where the funds rate equivalent is 0.01%, which means Japan is helping finance the U.S. national debt and making money in the process. With the U.S. notes and bonds it is acquiring, Japan is getting returns of 2% or more. It does not cost Japan anything to make a yen, or a billion of them. It could just as easily manage the dollar/yen rate by buying and selling its own debt, but it would not be as profitable.

JOBS AND OUTSOURCING: After thinking about the discussion that began in January about the jobless recovery, outsourcing, and runaway manufacturing, I have spent the last week writing a lengthy essay, “Globalization’s Newest Paradigm,” which we are sending to you today by snail mail. It is really too long to read at work and should be read in hard copy. It really is “Big Picture,” which puts today’s debate in the context of the 200 years since the Industrial Revolution began. It may not necessarily help you make business decisions as soon as you read it, but it may alter your perspective on what globalization is all about in this era. It should get to you by the end of this week. Let us know if you would like more copies. We will post it on the client page around April 1. Comments and questions are welcome, as usual. 

HAPPY ST. PATRICK’S DAY: Take it easy too. We’re looking over four-leaf clovers that we overlooked before.

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