Year End Rally
Jude Wanniski
December 26, 1991


The encouraging surge on Wall Street this week has more to do with the President's political attentiveness to an economic growth agenda than last Friday's one-point cut in the discount rate. The Fed's rate cut produced only a 20-point climb on the DJIA on the day of its announcement, with much less enthusiasm in the broader market. The 88-point boom on Monday began in mid-morning, the market opening on the downside after contemplating the weekend news. We, along with Fed Governor Wayne Angell, were not happy with the size of the cut, which played to the political crowd that has been arguing easy money is the answer to the recession. Monetary ease is required to prevent monetary deflation, which the Fed has been doing in crude, rather opaque fashion, keeping the gold price wobbling in a fairly narrow range. This was the basis of our summer forecast of a 7.5% long bond by year's end, and we take some pleasure in having met that target. Also, as would Angell, we prefer a clear, refined signal from the Fed, which would lead the bond market to much lower yields. Still, we are happy enough to inch our way along, giving Fed Chairman Alan Greenspan an "A" for his performance this year, not quite an "A+."

Greenspan's absolutely wonderful A+ Ways & Means testimony a week ago has had the desired effect of winning over the new White House, the "Sam Skinner White House," to a growth agenda that has a capital gains tax cut at the top of the agenda, while Budget Director Richard Darman had wanted to keep it hidden near the bottom. Skinner has shot down Barman's "two-tier" tax plan, which would have favored foo-foo tax cuts and doomed capgains. This good news began circulating Monday morning. The President, we are told by sources in the West Wing, was extremely impressed with the clarity of Greenspan's argument in favor of a capital gains tax cut and against "quick fix" tax cuts of the variety his political team has been floating. Darman is so wedded to his Budget Agreement he will sacrifice anything to keep it from being scuttled. In losing John Sununu as his most important ally in the White House, Darman has almost surely also lost his Budget Agreement, which will hit the skids when the President proposes a growth package and serious negotiations with the Democratic Congress. The Treasury plan of proposing a 19.6% capital gains tax only for future investments is certainly dead. Skinner prefers a straightforward approach and, it seems, wants nothing less than the 15% indexed rate for which the President campaigned in 1988. We've not been able to confirm rumors they may be thinking of a 10% rate, which is the number Mario Cuomo was pushing for long-term investments before he opted out of a presidential campaign.

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I spent several hours Christmas Eve at the Russian Embassy in Washington, discussing plans for another trip to Moscow in late January. The working assumption is that Boris Yeltsin will float the ruble on January 2 and remove price controls on most goods, because this is what he thinks the Bush Administration wants him to do. Yeltsin, who knows little about economics, is taking the word of Jeffrey Sachs of Harvard that this free market leap will soon produce goods in the state stores. It will take a week or two for the awareness to sink in that goods will not appear, only that the ruble will continue to lose value on the black market as the hyperinflation unfolds. The Russians inform me the ruble traded at 300-to-the-dollar in foreign-exchange auctions last Friday. As far as I know, the plan we have presented to rescue the economy is the only alternative in the ballpark, and I now have assurances that we will have everyone's attention in Moscow if, by the time we arrive, the situation has not palpably changed. We are working on a new draft of the outline I presented to Finance Minister Yegor Gaidar on December 10, with a detailed currency reform that will undo much of the damage being done at the moment. That is, spot transactions cannot be undone, but the value of the savings and pensions of the people can be restored to a considerable degree.

Professor Stephen F. Cohen, director of Princeton's Program in Russian Studies, wrote me this week after reading of my alternative plan: "As a longtime student of Russia, I have been distressed --to put it mildly by the advice Western economists have been giving first to Gorbachev and now to Yeltsin. Their insistence that the Soviet/Russian government immediately decontrol prices and desubsidize most everything else is recklessly ignorant of, or indifferent to, the fragile life lived by most Russian citizens. Russia is neither America nor Poland." Cohen, who leaves for Moscow tomorrow for two weeks, told me by telephone this morning that the people of Russia have never been advised of an alternative to the Polish "shock therapy" devised by Sachs and the Western bankers.

Although it would be nice if, at the last minute, the Bush Administration intervened with support for a postponement of the float and support for our alternative, I'm afraid they will stay out of it and simply watch from a distance. It's criminal to watch so many people suffering at the hands of the IMF crowd, but at least we might be able to get relief to the situation before it deteriorates completely. The Russians tell me most households, perhaps 80% or more, have been hoarding for a long time and would be able to withstand months of deprivation. Professor Cohen worries most about the elderly, whose pensions will be worthless and who do not have access to the free meals that the state enterprises provide their employes.

My further concern is that the Pentagon and State Department will continue to neutralize each other, as they have in the past, and allow Treasury to dictate policy toward the Commonwealth Government. The Pentagon, of course, has for years opposed Mikhail Gorbachev, wishing him no good, on the grounds that the Soviet Union should be demolished. It was State that pulled for Gorbachev, believing it would be easier to deal with a benign, reformed central apparatus than with fractious, ethnic entities. Defense Secretary Dick Cheney is now celebrating the demise of Gorbachev and the Union. Secretary of State Jim Baker, meanwhile, is openly predicting the collapse of Yeltsin and the Commonwealth. Thus, the military and diplomatic arms of the government remain gridlocked. Treasury representing the interests of the banks, remains in control. If Jim Baker really would like to see the collapse of the Commonwealth, he need only sit back and watch the bankers at work. So far, the Yeltkin people in the government are too busy celebrating to realize their man is being pushed into deep doo-doo.