Still Nervously Bearish
Jude Wanniski
December 4, 1987


There is still nothing at all on the horizon to justify a rally on Wall Street, and we can only hope that after the RR-Gorbachev summit the President will be able to turn his attention to getting a G-7 meeting, which does have the potential of producing constructive policies. Unhappily, Treasury Secretary Baker remains trapped in the same policy cul de sac that has engaged him all year, the idea that by threatening devaluation of the dollar he can get West Germany and Japan to do his bidding. The "strategy" of threatening Germany with monetary protectionism (which is what dollar devaluation is all about) and bashing Japan with both dollar devaluation and fiscal protectionism (tariffs and quotas in the trade bill) was responsible for the decline of the bond market last spring and of course was behind the market collapse last month. The zany strategy (See "Jim Baker's Cagey Global Strategy" by Leonard Silk of the NYT February 1) was designed by the devaluationists at Treasury, David Mulford, asst. secy, for international affairs and more especially, Charles Dallara, the senior deputy asst. secy, for int'l affairs (a protege of President Carter's manic devaluationist at Treasury, C. Fred Bergsten). Bergsten, outside Treasury, continues to cheer for a dollar at 100 yen. Mulford and Dallara are the pair behind the recent bashing of the Asian NICs, demanding they deflate their currencies which only increases capital flight and thereby increases the U.S. trade surplus. Dallara also has a key post at the IMF, where his influence poisons Third World economies.

Except for the President, who is totally focused on the coming summit, the key players in the administration are all now protectionists, including Secy. Baker, who still thinks he's a free trader in theory, but has succumbed to "practical" politics. Baker permits the Mulford/Dallara bashing and also permits the disgraceful protectionist flogging of Japan by Commerce Secy. Verity, Howard Baker's man.

Secretary Baker's single-minded objective is to get the trade deficit down, and he does not see that almost everything he's done has pushed it up. He understands that Germany and Japan have to expand their economies, but because his advice is coming from Keynesians, he continues to urge interest rate and revenue cuts on them instead of unsterilized interventions (which add liquidity) and income tax rate cuts, which would immediately pull in capital. The "expansion package" announced by Germany, 12-3, was pitiful, a half-point cut in the discount rate with no additions to liquidity, which left the dollar/DM rate unfazed. Plus a phony catalog of spending increases, which will have a miniscule effect on Germany's capital outflow (trade surplus). This tiny mouse is what he got in exchange for October 19. Some cagey strategy. A package worthy of "scornful laughter," which is how former West German economics minister Otto Lambsdorff put it, scornfully critical of Jim Baker for not pushing West Germany to cut tax rates!

Secretary Baker continues to say he is worried about the dollar's fall and that he's trying to put together a G-7 meeting to get policy coordination. But as Nixon's Attorney General John Mitchell once put it, "Watch what we do, not what we say." Baker continues to do nothing about the stories run in the The New York Times by Peter T. Kilborn that Baker wants the dollar to fall. It was Kilborn's 10-18 piece to that effect, remember, that triggered the Crash. He never quotes Baker directly, but Kilborn, himself a Keynesian who believes in the efficacy of devaluation on trade flows, leans heavily on Bergsten as a source. Dallara, the Bergsten clone, is almost certainly his chief source for these mysterious stories that have been hammering the currency markets all year. It was Bergsten, I never tire of pointing out, whose devaluationist fixation as Treasury Asst. Secy, for International Affairs under Talk-Down-the-Dollar Mike Blumenthal that sent interest rates and inflation into the stratosphere and pulled down the Carter Administration. Jim Baker is now without question under this destructive influence.

The market decline this week surely reflects the mouse that crawled out of Bonn and Jim Baker's applause for it. But the tax and spending bills ripening in Congress are sickening too, loaded with pork and protectionism. There are mutterings about a veto, but the congressional reporters are writing with such certainty about passage of the legislation that we assume there are so many goodies larded in that they can't fail. This is why we worry so much about the trade bill. It will have monumental amounts of pork throughout to grease its way, and while the President has vowed to veto a protectionist trade bill, I now assume that whatever comes out of the Congress will have JBIII's okay on it, and with Howard Baker and William Verity cheering for it, we have to assume a weak veto at best that might be overridden. The bill will not be unfurled until February, perhaps March, so it will be tangled up in presidential politics. I'm now virtually certain JBIII believes even a bad bill is better than none and that he'll find any excuse to get one. Who knows his motives? Perhaps he believes the trade issue would be a burden for George Bush, his candidate in '88, during the general election, and a trade bill would dispose of it. Perhaps there are elements of the bill that he wants enacted, pork that he's dealt away in other legislative deals he's had to put together at Treasury. Whatever, it's not promising.

A G-7 meeting at least would cut against these negative forces, with our trading partners desiring an end to the dollar's fall and a promise of no protectionist trade bill. The trade bill also becomes bargaining material for Baker at such a session, with even the possibility that he could bargain it away entirely for what he wants out of the meeting. As much as he wants a bill, he knows when it finally lands on RR's desk, it will bring screams from the worldwide free-trade community, which makes the veto outcome unpredictable.

Back at the Fed, Greenspan is being hailed as a hero because the Fed pumped liquidity into the banks after the Crash and helped talk Reagan into a tax increase. Easy money and fiscal tightness, of course, is another artifact of the Carter years and Keynesians in general, which Greenspan practices. The scorecard during Greenspan's brief tenure is a collapsed dollar, a gold price pushing $500, a Dow Jones average almost 1000 points lower than where he found it. (In March, at the Autranet conference in Beaver Creek, Colo., in Greenspan's presence, I prediced the Dow would go to 585 in a Greenspan Administration. Everybody laughed but Greenspan.)

Yes, the Fed pumped out liquidity after the Crash, when we assume that higher cash balances are in order. But as the panic ended, the liquidity was not all sopped up, and the gold price is now $30 higher than it was the week before the Crash. Here, the Bundesbank is right. The Fed has to be snugger than it is to keep the dollar from sliding. They don't like that at the Fed. Inflation is more fun. But it's the only alternative to the dual tracks of monetary and fiscal protectionism we're still riding. If JBIII can be talked into pulling the trade bill, it would make monetary policy a lot happier job.