Easing at the Fed/Election Results
Jude Wanniski
November 8, 1989



The quarter point drop in fed funds was applauded by the financial markets. The easing confirms expectations in the gold market following the October 13 crash, when the stock market discounted a low probability of getting a lower capgains tax this year. Alan Reynolds points out that unlike the usual pattern, the surge in the gold price has not been accompanied by a particularly weak dollar, and prices of other metals (silver, copper, aluminum, tin...) have been weak. This suggests that expectations of Fed easing may not be the only force pushing gold up. Alan posits that since none of the leading proposals to cut capgains applied to gold, the prospect of lower capgains tax on stocks and bonds was making gold holdings, which only pay capital gains, less attractive. Conversely, the October 13 event would require a one-time uptick in gold and a matching correction in stock prices. By itself, this does not mean continuing increases in gold or continuing declines in stocks.

Gold at $390 implies less deflation (more inflation) than at $360, the level at which it hovered for the last several months. The Fed governors, I think, are well aware that it puts Greenspan's goal of zero inflation in five years a bit further out. But I had argued that the "fiscal shock" of pulling the rug from the capgains cut October 13 meant the economy would be too uncomfortable at the $360 gold level at the moment, putting a bit too much pressure on dollar debtors via commodity deflation. As the White House gets its act together for another run at capgains between now and February, my hunch is that the Greenspan Fed will let the consequent surge in the demand for dollars first take gold back to $360 before easing again. I certainly don't expect another easing with gold bumping $400


In NYC, my vote would have gone to David Dinkins, who had it right in his Sunday debate with Rudy Giuliani that the contest was for mayor, not prosecutor. Giuliani was all heavy breathing. Dinkins can succeed, but only if he pulls in some growth-oriented advisors. He has some solid people around him, but thus far no supply-side thinking. (New Yorkers, give him a call!) In New Jersey and Virginia governorships, the GOP also ran miserable campaigns, hypnotized by the phony idea that negative ads, not issues, won for Bush in '88. Roger Ailes and Roger Stone were behind the awful Senate campaign for Pete Dawkins last year and for Jim Courter's bomb this year. I warned bcith Dawkins and Courter in advance that the Rogers would only do negatives (or walking-on-the-beach TV spots, with the wind blowing in their hair.)

The new conventional wisdom will be that pro-life should be avoided like the plague. President Bush was correct in his press conference, though, that there are very few one-issue voters, but only if the candidates are multi-issue candidates. The winning GOP growth issue was not in evidence in any of the three major races. Courter made some good growth speeches to a few dozen people here and there, but his Roger Ailes' spots seen by millions were either bashing Florio or had Courter walking on the beach. Zzzzz. The RNC and Lee Atwater better learn from all this quickly, in time for the state races in '90 that are critical to redistricting. But I doubt it's possible. Atwater is a knife-fighting operative, and the RNC needs someone like Jack Kemp or Bob Packwood at the top, to find good young growth candidates and help them develop positive programs that reach across party and racial lines, linked to a national philosophy emanating from the party chief in the Oval Office. The material is all there, waiting to be picked up. But it requires a strategic thinker, which Atwater ain't.