Odds and Ends
Jude Wanniski
October 6, 1989


CAPGAINS: It's a bit nerve-wracking, watching the skirmishing in the Senate over capgains, the class-warfare Democrats going nuts trying to reverse the trend toward a permanent cut. The funny stuff has to end as the Gramm-Rudman deadline draws near, and we're sure we'll see an accommodation between Senator Bentsen and Minority Leader Bob Dole that will permit a floor vote. We're told there are 10 solid Democratic votes and another 10 that would like to come. Treasury Secretary Nick Brady, by the way, is terrific on the whole issue, finally learning the supply-side arguments! But Senator Bill Bradley shows not the slightest sign of understanding the import of the cut, despite all the time and effort we've put into him. Since he gets these FYIs, we'll try one more time: Imagine, Bill, a dollar invested today doubles in a year, and doubles every year thereafter for 20 years. At the end of that time that asset will be worth $1,048,576. But if you subject the asset to a 35% tax bite each year before it doubles again, at the end of 20 years it will be worth a mere $22,370. Such is the power of the capgains differential via the magic of compounding. This is essentially why Japan's stock market has risen TEN TIMES more than ours in the last 15 years, with its 5% capgains rate a key ingredient in its supply-side economic mix. You see, Bill?

MONEY: It was correct for the other G-7 countries to tighten this week, the Fed keeping the dollar price of gold steady at $360. The bond markets are increasingly impressed with the G-7 coordination mechanism, keying off commodity prices. The Fed will be able to shave short rates on the next go-round, as the dollar price of gold falls, the D-M and yen price of gold holding steady.

SOVIET MONEY: It got almost no notice, but Secretary of State Jim Baker Wednesday told Senate Finance that the Soviets need to have a convertible ruble before they have price reform, which is a prerequisite to IMF membership, and that they could go to a gold-backed ruble! This is an incredibly important signal to Moscow on the eve of Alan Greenspan's visit this weekend through Tuesday. The Soviets had assumed the IMF would frown on a gold ruble. Baker's public remarks neutralizes any IMF opposition. JBIII has also dispatched his right-hand man, Bob Zoellick, to Moscow with the Fed chairman. Zoellick essentially agrees with the Angell-Wanniski formula for Soviet monetary reform, thus fortifying Greenspan, who might otherwise tend to waffle. I'm almost sure Baker realizes this whole enterprise opens up the re-monetization of gold in the West, toward an IMF gold SDR. Before his death a few years ago, DeGaulle's finance minister, Jacques Rueff, predicted the West would be led back toward gold by the Soviet Union and a gold ruble!

PANAMA: President Reagan would not have botched the Panama coup. Nor would President Bush with John Tower as Pentagon chief. We love Dick Cheney, but his elaborate excuses on why there was no green light from him reminds us of General MacArthur's dictum: "Councils of war breed timidity and defeatism." Cheney has the brains, but may not have the stomach for the job.

EDUCATION SUMMIT: Of course, Bill Bennett was right about Charlottesville. Pap and crap. There ain't gonna be reform until egalitarianism is rooted out of the public schools, i.e., flunking kids from first grade through high school who don't meet standards, instead of rewarding them with automatic promotions. Newt Gingrich wants to add an incentive, paying kids who manage to skip grades! On the social issues, the President remains too kind and gentle. Maoist compassion has been the source of the problems.