Dog Days: A Lot to Worry About
Jude Wanniski
August 3, 1990


IRAQ & OIL: The $7/bbl run-up in the world oil price, to $23, in recent weeks, will add only slightly to the distress in the U.S. economy. After the smoke clears, Iraq will have a bit more control in regulating production from Mideast oil fields, but the speculative shock now reflects the potential of worst-case scenarios, general conflict, oilfield destruction, etc., and that seems unlikely as the West contemplates its feeble military options. When the oil price quadrupled in 1973, the situation was quite different. The gold price had already quadrupled, to $120 from $35, as a result of President Nixon's dollar devaluation policy. The current run-up occurs following a mild deflation in gold over the last several months, which has squeezed Mideast treasuries, including Iraq's. My guess is that the gold price will resume its slide and oil will slide back to around $20, close to its rough equilibrium price with $350 gold (which remains, I think, the most likely target price over the balance of the year). OPEC does not have the power to set the long-term oil price, and this adventure only increases the oil-consuming world's search for alternate sources.

IRAQ & HISTORY: Of course everyone in the West is jumping up and down about Saddam Hussein, "the most dangerous man in the world," as the news magazines have been reminding us for weeks. Yes, he's a bad guy, etc., etc., but perhaps more like a Napoleon than a Hitler. I've been waiting for 20 years for the crumbling of the Arab monarchies, which are historical relics. Kuwait, Qatar and the Emirates are not even enlightened monarchies, but rather tribal despots presiding over tiny populations sitting on vast petroleum pools. They have protected themselves thus-far by various political alliances, but the march of history has been foreshadowing some kind of rumpus to even things up. It has always seemed likely to me that before the Middle East catches up with the political forms of the Western democracies, the monarchies would go through an amalgamation with the regional dictatorships. It's not a pleasant process, however. Just as Napoleon shook up the crowned heads of Europe, Hussein has given the elected heads of the West new problems to contemplate. Of course, if the Western powers do not draw a persuasive line, Hussein may well turn into an Arab Adolf, snatching the UAE, then reaching for Saudi Arabia. Israel seems pleased that it was not Hussein's target, this time, but history is also marching against Israel as it is now constituted. The events this week make it ever clearer that something must give in there, that it must make up its mind on whether Israel will be a secular democratic state or a religious oligarchy.

U.S. ECONOMY: The White House has been surprised and dismayed in the last several days with fresh signs in the official statistics of economic weakness, especially today's unemployment numbers, the weak purchasing agent report, and downward revisions in first quarter GNP. Recession talk abounds. There is still a stubborn tendency at the White House to blame the Fed instead of the Democrats, for blocking capgains last fall, and we may hear some of that publicly in the next several days. But The Wall Street Journal has it figured right in its editorial this morning, noting that the run-up in oil prices should muffle political pressures on the Fed to ease and the only logical option left to the government is to renew its call for a capital gains cut. A Senate vote on the Kasten-Mack 15% capgains proposal is expected this weekend, as an amendment on the debt ceiling legislation. It won't pass, as the Democratic leadership will crack the whip and Democratic supporters will find excuses to pass. At least this provides another opportunity for President Bush to beat up on the Democrats on this issue. There seems to be more or less of a consensus at the White House to step up partisan rhetoric during the August recess. There is apprehension that the President and his team will simply grumble about the big-spending Democrats, which loses votes for Republicans every time that austerity note is sounded. House Minority Whip Newt Gingrich still huffs and puffs along those lines no matter how hard his best friend in the House, Rep. Vin Weber of Minnesota, chairman of the House GOP Policy Committee, urges him to elevate capgains instead. If the President chooses the wrong strategy now, he chooses recession and a sad outcome in the November elections.

S&L AUCTION: The Resolution Trust Committee will auction off $50 billion in properties November 15, a week after the elections. The hooplah of high-tech satellite hook-ups around the world will not save the auction from massive flop. Property developers already know what the RTC has in its portfolio. They could walk into any RTC and strike a deal now, but are not doing so. They have largely spurned the overvalued, often-broken, run-down properties that can be had elsewhere, without the hassle of dealing with the government. Developers tell me they expect to see plenty of bids, but very few closings, and the talent it takes to take sows ears and turn them into silk purses won't even show up at the auction. The banks that would have to finance the sales are not in a generous mood anyway. We could be smack in the middle of a recession in mid-November. And real estate should be slumping further as state and local taxes get piled on around the country. Sen. Connie Mack of Florida is trying to develop interest in a proposal to offer a zero capital gains tax to the first buyer on any RTC property bought at auction. The RTCs William Seidman yesterday said a lower capgains rate would increase the prices paid at the auction. A zero rate, developers assure me, would bring in serious buyers, who would know they could add value even as inflation continues and they would not get socked for capital gains taxes on the inflated portion of the increased price. Mack has sold HUD Secretary Jack Kemp, who is one of the three RTC trustees. To debate such an amendment on the Senate floor this fall, before the elections and the auction, would clearly link the interests of taxpayers and owners of all capital assets to the capgains proposal. Democrats who are trying to blame the GOP for the S&L costs would have to argue against this powerful case for reducing taxpayer costs.

GORBACHEV AND YELTSIN SUMMIT: Now we have reports Soviet President Gorbachev and Russian President Boris Yeltsin are going to hammer out a market-oriented reform by September 15. Does this sound like our Budget Summit, or doesn't it? Gorbachev has decided to be kinder and gentler toward Yeltsin and foster a spirit of bipartisanship. The problem is that neither of them know what they are doing and one more reform deadline will come and go without results. The primary problem remains the inconvertible ruble, and I continue to see no movement in that direction. The state bank last week announced yet another parallel currency for foreign trade. I've lost track of how many different rubles there are. The foul Russian cigarettes have disappeared from the markets, monetized the way Marlboros have been for years. One republic after another has declared "sovereignty" from Moscow, but Moscow remains sovereign over the entire empire in its mismanagement of the national currency.

NEW JERSEY: Yours truly, ahem, had the distinct honor this week of being denounced by New Jersey Gov. James Florio as a "radical," whose supply-side ideas have caused most of the nation's financial problems. His press secretary chipped in with a tirade against Polyconomics, an "avowed supply-side" consulting firm, and announced that we were responsible for the S&L crisis too! The fulminations came in response to questions about our recent report on the serious damage the Florio midnight tax hikes will do to the New Jersey economy. On the same WNBC television clip, New Jersey Senator Bill Bradley twice refused to take a position on the Florio midnight tax hikes, insisting that was "a state matter," and that his was a "federal jurisdiction." His GOP opponent in the Senate race this fall, Christine Todd Whitman, ridiculed Bradley for dodging the question. After all, he campaigned for Florio last fall, and is a New Jersey homeowner and taxpayer. "If the state were flattened by an earthquake instead of the Florio tax package," she said, "would Senator Bradley have an opinion on a request for disaster relief?"

ITALY: New Jersey's most noted "radical" is slipping away August 11 for a two-week sojourn in northern Italy, on a visit to Canada's most-noted radical, Professor Robert Mundell, at his castle in Siena. There, we will plot the Counter Counter-Revolution, and the demise of Mssrs. Florio, Bradley, Saddam Hussein, and other Forces of Darkness. Ciao.