In Washington, Aug. 31- Sept. 2
Jude Wanniski
September 4, 1981

 

Next 10 days are critical.  Congress returns Wednesday, early arrivals reflecting grassroots near-panic over interest rates.  Small business living hand to mouth, no inventories. Situation ripe for gold to catch fire.  Monetarism approaches terminal status;  Stockmanism close behind as both M1B and budget cuts (+ added Pentagon cuts) bring only yawns from bond market.  Beryl Sprinkel will not last the year.  Politicos in White House call him a "Druid," interested only in proving monetarist theory, not lowering interest rates.  Stockman also frantic, arguing that bond rally will ensue in October when spending cuts bite and bond traders (meaning H. Kaufmann) take him seriously.  Stockman used to believe in efficient markets.  I pointed out to him that in 1945, before he was born, financial community financed $60 billion deficit, 24% of GNP, and total fed debt was 119% of GNP at 2% interest rates.  The 1980 deficit was a mere 2.1% of GNP and total fed debt 27% of GNP.  I ask what makes him think market will be impressed with another $10 billion or more cut in Pentagon budget?  I tell him he's turning into Jimmy Carter's budget director.  "Why should I believe you instead of bond traders?" he asks.  (In 1945, of course, currency was tied to gold and citizenry was assured bonds would be redeemed with eguivalent real goods.)  Reagan guoted in LA Times saying he remembers when interest rates were 3% and we were on gold standard.  Breakfast with Murray Weidenbaum and Marty Anderson.  MW says he takes gold issue seriously, entirely open-minded, never wrote any articles on money.  Stunned when I reported Alan Reynolds' numbers of M1X:  "But that means money isn't tight."  Questioned me for 1   hours on gold.  Anderson supportive, stating belief paper money gets value from gold, not vice versa.  Says opposition to gold standard are "hollow trees" that will fall over when shoved.  Confirms to Weidenbaum that RR pushed gold until September 1980, when high command shelved issue to avoid distraction during campaign.  Anderson says something I didn't know, that in 1946-47 China inflation under Chiang Kai-shek, Mao Zedong and Communists promised return to gold standard to win over peasantry.  Both ask me to send all material I believe relevant on gold & stay in touch.  Ran into Pete Hannaford, RR's ghostwriter for decade and wrote RR's acceptance speech.  He too is pushing for gold, gently, on Meese and ex-partner Deaver.  September 10 meeting of "greybeards," outside economists, George Shultz, Friedman Simon, Laffer, Kemp, chaired by Reagan.  Kemp plans big gold push in House GOP conference and with greybeards, major speech in works, clearly Mr. Outside leader on issue.  Lew Lehrman, Mr. Inside, in-waiting to succeed Sprinkel.  Kemp will try to solve air-controllers dilemma, breaking Old Guard, Volcker grip that believes labor causes inflation and discourages RR from amnesty move.  Kemp to start petition move, among working air controllers, asking RR amnesty for strikers who repent.  Kemp thus seeks AFL-CIO support for gold as solution. September 18 next meeting of Gold Commission.  Wall Street Journal has filed "Freedom of Information" papers to open proceedings to press.  A media event in works.  Alan Greenspan WSJ (9/1) pro-gold essay seen as breakthrough;  AG can come out of closet as gold becomes fashionable.  Frenzied monetarists in disarray, making Keynesian anti-tax arguments seeking scapegoats, but some clear moves seeking figleaf compromise with gold.  Laffer conciliatory to Friedman, but Kemp hardline against gimmicks.  Talk of $400 gold peg, safe against deflation or excess inflation until eguilibrium reached.  One worry:  Bond rally anticipating gold will be cited by monetarists and Stockman as evidence of their success.  See-saw battle likely until gold is decisive.  January 1 deadline in everyone's mind.  "I will not become a Margaret Thatcher," RR says, and word is spread by David Gergen, White House communications chief.  Gold will EXPLODE in press this week and next.  Watch and see.