Spring Fever
Jude Wanniski and David Goldman
March 22, 1991


If you're reading the papers, nothing is happening on capgains. The President is supposedly fearful of losing his popularity by tangling with the Democrats on the fairness issue and will be content to coast to re-election in '92 on his Gulf War laurels. His political advisors at the White House are counseling being miserly with his accumulated political capital. Domestic economic policymaking has ground to a halt at the White House. When questioned, Treasury Secretary Nick Brady seems forceful enough on capgains, but he doesn't ever take the initiative on the issue. The Greenspan Commission has dropped out of sight.

All that's the news of winter. Spring is here, and I'm feeling the sap starting to run. In the last few weeks I've spoken to the President's top political advisors: Bob Teeter, his pollster; Roger Ailes, his media man; Clayton Yeutter, the RNC Chairman. I've talked to White House Chief of Staff John Sununu, Vice President Quayle's CoS Bill Kristol, Chief Speechwriter Tony Snow, Fed Chairman Alan Greenspan, Treasury Secretary Brady, House Minority Whip Newt Gingrich and Rep. Dick Armey, ranking Republican on the Joint Economic Committee of Congress, plus several Senators and Congressmen and assorted bureaucrats, all on capgains. I can't quote, but I can report the issue is alive and well.

There are indeed plenty of congressional Republicans who wish the idea would go away, but there are three people who count who are serious about it, which is why hope springs eternal: Bush, Brady and Greenspan. My guess is that the issue will begin to develop as part of a general, philosophical discussion by the President on broader themes. We forget that in his last two years, because the strategy on the economic side had been to work behind the scenes with the Democrats, the President never gave a single speech laying out a vision of the economy as he would like to see it unfold, here and abroad. His "New World Order" has no economic component, as yet. But with the whole world in awe of George Bush at the moment, what he has to say about the world economy in general, and the U.S. economy in particular, would have everyone's attention. Among those people mentioned above, I find widespread interest and enthusiasm for such an approach, which does not confront the Democrats directly, but simply develops general principles on the nature of economic growth within a system of democratic, entrepreneurial capitalism. The nuts and bolts come later, a package of ideas including capital gains, which would then seem compelling, not controversial. The Greenspan Commission, which is getting close to being unveiled, will also assist in depoliticizing the growth agenda. Be patient. From outside things look deader than winter. From inside, there's a fresh breath of spring. (JW)

WHENCE THE DOLLAR RALLY?: The dollar appears to have settled into a trading range of DM 1.63-1.65 for the moment, following a 15% rally against the mark since February 11, as markets wait for more information. Several indicators suggest more dollar strength down the road. Our February 12 forecast of a dollar rally was based on an examination of what might be called arbitrage between different time horizons; during December and January, investors bought DM, but also purchased long-term U.S. Treasury bonds as the dollar declined -- a strong signal that the market expected eventual dollar appreciation. As the DM plunged against the dollar from late February into March, long-term Treasury prices remained fairly stable. That is, investors continued to buy U.S. Treasury securities, even at a higher price relative to assets in other currencies, a sign of long-term dollar strength. Britain's half-point interest rate cut this morning and similar rate cuts elsewhere in Europe barely affected European currency cross-rates, another sign of potential DM weakness. (DG)

GERMAN DISARRAY: This week's spat between Bundesbank President Karl-Otto Poehl and the Bonn government embarrassed both parties, and left Germany without a clear policy direction in the face of a weakening economy and currency. In a Brussels speech Monday, Poehl blamed Germany's currency union with former East Germany for the DM's present troubles, then retracted his comments under pressure from Bonn. Contrary to expectations, the Bundesbank took no action this week to tighten credit to stop the DM's slide, in part due to government pressure. Previously, though, the Kohl government bent to Bundesbank pressure to reduce Germany's federal deficit, and reimposed the higher tax rates that had been reduced in December 1989. Higher taxes ensure even worse economic chaos in the former East, now beset by mass demonstrations of unemployed workers, and slow growth or recession in the West. The present compromise between austerity and growth policies breeds pessimism. Germany's stock market index, correspondingly, is down 8% over the past month in dollar terms, the worst performance of any of the large industrial countries. (DG)

JAPAN WORRIES US: GNP growth fell to only 2% during the fourth quarter of 1990, compared to a 6% growth rate during the first three quarters of the year. Japanese economists are sharply divided over whether this represents a temporary "growth recession" or a new trend. Most disturbing, though, is that central bank governor Yasushi Mieno, in rejecting a discount rate reduction this week, specified a 2-3% growth rate as the central bank's "anti-inflation" objective. The country's leading business associations backed him in statements reported by the Kyodo wire service this morning. Mieno's campaign against "asset price inflation" has already provoked a 10% price drop in prime Tokyo real estate and 20-30% declines in other land prices. A continuation of Mieno's monetary squeeze would furthur damage Japan's economy, with ripples in other markets. (DG)