Odds & Ends
Jude Wanniski
October 27, 1989 (1 p.m.)


CAPGAINS: Chances dwindle of winning on capital gains without a major public effort by President Bush, as the Senate Democrats dig in their heels. A war of confrontation and attrition is a loser because Dems still have more votes. An end run, with Bush throwing a long pass instead of grinding it out on the line, is the more likely winner. And there's growing support in the White House, Cabinet and RNC for this bolder strategy --a Bush TV speech to the nation, putting the Senate squabble in context. Dems are getting away with the argument that Bush is willing to hold up important aid to Poland, etc., just to get his pet capgains cut for the rich; Bush has to speak about the greater importance of capgains to the U.S. economy, putting the onus on Dems for any weakening of the economy in '90. Senior administration officials tell us, "hang in there, relief is on the way." The idea will be kicked around on Air Force One this weekend, during travel to the economic summit in Costa Rica. Given the number of supporters of the idea, I'm betting it happens, but not the ranch. Darman likes the idea.

MONEY: Supply-siders at the Fed worry about getting blamed for a weakening of the economy in the next two quarters if capgains flops in the Senate. Wayne Angell warns that logjams are building up as business, real-estate transactors defer decisions while awaiting the outcome of the capgains dispute, a problem that would compound if the White House yields to Democrat demand that it wait 'til next year. Meanwhile Fed-Treasury dispute on the dollar goes on the back burner, the Fed having won this latest round.

PERESTROIKA: Moscow's decision to devalue the ruble to 16 cents from $1.60 is dopey, dumb, dizzy, instantly boosting inflationary expectations, further draining Gorby's credibility in his capacity to get the economy on track. This very bearish sign forces us to wonder how long it will take for a capable economics minister to emerge. Leonid Abalkin ain't the guy. We praised Secretary of State James Baker HI for his recent speech cozying up to Gorby, offering technical advice. Administration skeptics (Defense, NSC, Quayle) worry that JBIII has been going too far out on a limb with Gorby. The ruble devaluation is a point for the skeptics.

GOLD BONDS: Fed Chairman Alan Greenspan discussed gold bonds with the Soviets on his recent Moscow trip, an idea he has long favored for the U.S., as a means of economizing on debt finance. Don't be surprised if we begin to hear serious discussions about this from Fed and Treasury officials in connection with debt finance in '90. Financing new debt with 2% gold bonds would save real money, and bring down the whole interest rate schedule, we think. It wouldn't take long before it re-ignited movement toward international monetary reform. The other G-7 nations would not be happy with the U.S. stepping to the front of the line in world capital markets, instead asking for a general accord involving gold re-monetization.

MAGGIE: The resignations of Nigel Lawson and Sir Alan Walters is, on balance, a plus, Walters being twice the negative to Lawson's positive vis-a-vis European economic issues. I met the new Chancellor of the Exchequer, John Major, last month in NYC, and discussed the Lawson-Walters dispute over a sterling link to the EMS. My point was that Maggie is right to resist a Bundesbank-dominated EMS, but not for the Walters' monetarist reasoning. A broader agreement involving Washington and Tokyo would dilute the influence of Bonn and make it easier for London to sign on, I argued. Major seemed receptive, non-dogmatic (unlike Walters), and although the chat-was all too brief, I came away impressed. Maggie may have lucked out again.