Confidently Bullish
Jude Wanniski
January 20, 1989


Moments ago, George Bush completed his inaugural address, simply adding to my exuberance about the period ahead. I returned from Washington yesterday, after three days of meetings with policymakers on Capitol Hill, the White House, Treasury and the Fed, confident that positive forces are dominant at the moment. The single most important impression I came away with is that the Bush team realizes it has a hard act to follow, unlike 1981, when the new Reagan team was cocky in its belief that anything it did would improve on the Carter years. Where monetarists and conservative Keynesians abounded in '81, supply-siders relegated to a few odd corners of the Reagan administration, the supply-side growth ideas are now embedded everywhere except at Treasury. And since all of Washington seems to sense Treasury is the weak link of the Bush administration, including much of Treasury itself, my strong sense is that it will be strengthened soon, to shore up Secretary Nick Brady before the weakness of his team causes serious problems for the whole government. The only ideologue at the top, Charles Dallara, has now been elevated by Brady to assistant secretary for international affairs, the same post held by Dallara's mentor, C. Fred Bergsten, in the Carter Administration, which Bergsten helped wreck with his devaluationist policies.

My optimism now rests on the knowledge that this virus is being isolated. The G-7 accord is so central to the strategies at OMB, State and, for the most part, the Fed, that the dollar policy that's been missing during the lame-duck vacuum will almost surely emerge soon out of the White House cabinet council on economic policy. With gold bumping $400 and the dollar trying to push through 130 yen, we're on the threshold of an easing at the Fed, with a chipping away at short rates to prevent further strengthening of the dollar -- which I said would come as we got closer to today's inauguration ("Things are Better Than They Look," November 11). We could see some big moves in stocks and bonds in February, as it finally dawns on the dollar bears that we've turned the corner for good: The Fed will now be forced to ratchet down the Fed funds target, thus bringing down the whole interest-rate schedule. The unlikely alternative is renegotiation of the G-7 exchange-rate range to a higher level, letting gold slide another $30 or $40 in the process.

The next discount rate move will be down, trailing a slide in Fed funds. Or, if the regional Fed presidents remain stubborn in seeing inflation just around the corner, a break in commodity prices would let the Fed governors yank the discount rate down by themselves, pulling Fed funds in its train. Unlike 1983, when Paul Volcker laughed off the fall in gold below $400, we now have a Secretary of State, an OMB director, a CEA chairman, and a solid bloc at the Fed who know what's going on. Alan Greenspan wouldn't mind seeing the dollar strengthen against gold, but he doesn't want to see it strengthen against the yen, so he's boxed in too. In any event, he'll be jawboned by Baker and Darman if he doesn't relent to these pressures. It seems a pat hand.

There's plenty to worry about as President Bush goes to work, however. His team is weak on international economics across the board. The deficit still has minefields for Richard Darman to skirt. There's the dangerous new trade law, the S&Ls, the environmentalists ready to attack, Ortega, Noriega and Castro. But I'm surprised to find myself more bullish today than I was in 1981, the day President Reagan took the oath of office. But then, we've come a long way.