A Week in Washington Jude Wanniski July 6, 1984

With RR leading Fritz by huge numbers in the polls, the GOP is in the doldrums. Why do anything?  Wait and watch the Dems.  No interest in the White House in poking the Fed.  Jim Baker thinks nothing much can be done after June 1 that will affect the economy in November;  he doesn't see the wealth effects of a DJIA 300 points higher or lower.  So there's no climate for Volcker to end the deflation spiral.  Gold at $351 has Kemp yelling at everyone in the West Wing and at Treasury.  The markets fear another tightening at the July 15-16 FOMC meeting.  But one of Paul's main guys tells me Paul won't go for further "snugging" (he thinks) because Volcker has been watching the Journal of Commerce index of industrial commodity prices, which peaked March 30 at 253.1 and skidded to 237.1 on June 29, a 27% annual rate.  Holding steady is better than snugging, but it's not good enough.  The Fed has to get gold over $400 to prevent further deflationary damage, the spread of the debt crisis in the farm sector to the rest of the economy.  A general euphoria pervades Treasury, everyone figuring the economy will hold together through November, despite the market declines; my warnings of a sour economic mood in October is pooh-poohed.  Only Asst. Secy. Manley Johnson acknowledges the economy will be weaker than if stocks and bonds hadn't been declining, "the wealth effects."  The Fed's Vice Chairman Preston Martin isn't as alarmed as he should be, says Martha Seger is better than her testimony during confirmation hearings, that she had to dance around to keep from being pinned by Proxmire & Co., but I don't know about that.  Kemp introduced his gold bill on June 29 and we should see it surfacing in the press soon.  No Senate co-sponsor.  Laxalt thought about it, likes it, lunched with Kemp, but after a weekend at Camp David with the Prez says "timing isn't right" for him to co-sponsor.  Too close to Prez, altho Laxalt says the President is "gung-ho" about moving in that direction and wants convertible gold coins in the future.  Also, maybe a Presidential speech in September pointing in the direction of a second-term monetary reform.  Don Regan tells Kemp he thinks there will be a gold-based reform in the second term, and he wouldn't mind seeing it in the GOP platform as long as the wording was okay.  But this is pretty squishy.  Other Treasury bureaucrats want to keep "gold" out of the platform to keep the monetarists at bay.  From a few sources, I hear that Dick Darman is pushing the idea, though.  A surprising influence on the issue could be Richard Nixon, who talks to the Prez and top White House advisors two or three times a week.  I met with RMN in his NYC office on June 19 for 1 ½  hours and it's clear he's unhappy with his August 15, 1971, decision to float the dollar.  Nixon worries that the economy could be "pointing in the wrong direction" come October, and "you don't have to be in a recession" to have the politics cut against you.  He says pollster Al Sidlinger tells him to expect unemployment to be up-ticking in October and I agreed.  I told him the closer we get to $400 gold, the better for the economy and GOP prospects, the further below, the worse.  It was $372 and is now $351;  he said he would watch it.  He's being wooed on the Kemp gold bill, as is Kissinger.  Morton Kondracke of The New Republic says it would be dynamite if Nixon and Kissinger came out for gold.  Instant international credibility. Nixon and Kissinger have already said publicly they favor a new Bretton Woods and RMN recalls Arthur Burns advised him against floating. So there are at least a few favorable straws in the wind.  While the White House watches the Dems, the impact of deflation will get worse on the real economy.  So maybe the time will be ripe for the GOP convention in Dallas.  But RR had better start shooting at the Fed very soon.