Economic Odds and Ends Jude Wanniski and David Goldman November 6, 1992

NO TRADE WAR is likely, as the EEC is retreating from trade confrontation over the soybean controversy. German Economics Minister Jurgen Moellemann, in a radio interview this morning, said that an agreement with the U.S. over agricultural subsidies should be reached on the basis of the most recent American compromise offer. Conflict with the U.S. would be a "bad joke," Moellemann added. With the Germans, British and Dutch now lined up against the French, it appears that trade negotiator Carla Hills' high-stakes gamble on trade war has succeeded. The rest of Europe will not commit economic suicide to help the French government solve its political problems with farmers. After the dust clears, the Maastricht movement in Europe will find itself in even greater disarray. (DG)

WITH GOLD DOWN another $3 to $335 at noon, bond prices continue to fall. Our model of day-today changes in the long-term bond yield continues to show that the Fed's error on the side of deflation is behind the recent troubles in the bond market. The price of gold at $350 is part of the Fed's policy mix, but not exclusively. The lower it gets, however, the larger it looms in the minds of the Fed governors. At this level, Fed Chairman Greenspan and every other Fed governor should be aware that Fed policy is suboptimal and the fed funds target should be cut to 2.75%, which would permit the addition of liquidity to the banking system. A detailed readout of the numbers is available on request. (DG)

MESS IN MOSCOW: President Boris Yeltsin and Acting Prime Minister Yegor Gaidar are hanging by their fingernails. Rumors of a coup abound. With winter underway, economic conditions are deplorable, the ruble on its way to becoming worthless. Zbigniew Brzezinski is absolutely correct in stating that conditions in the former Soviet Union today are far worse than conditions in Germany in the 1920s. He's careful to say he is not predicting the emergence of another Adolf Hitler, but the drift of his fears is exactly in the direction of fascism, which is what we have been warning about all year. The stupidity of the U.S. Treasury Department in pushing the Yeltsin government toward "price liberalization," which in effect translates into rampant inflation, has brought the country to the brink of political chaos. The Treasury/IMF team would love nothing more than to see Yeltsin free the one price that is keeping the ruble from going into a free fall, the ruble price of oil. In effect, the country has been on an oil standard, the one commodity the government has been freely selling to its citizens and industries at a price that gives some value to the currency. The inflation has escalated over the last year as Gaidar has bowed to pressures from the Treasury/IMF crowd and ratcheted up the ruble price of oil. My advice to the Yeltsin government has been to go in the opposite direction, in conjunction with a deflationary bond issue, but that advice has been drowned out. I don't expect any improvement of advice from the Clinton Treasury on this matter. Note in this morning's New York Times that David C. Mulford, Undersecretary of Treasury for International Affairs, has resigned to take a megabuck job with CS First Boston. Mulford was the man most responsible in the Bush Administration for our economic policy toward Moscow. This thoroughly inept bureaucrat told the Times that Yeltsin deserves high marks for the changes he has made since taking power a year ago: "It's amazing they have accomplished as much as they have in the short time they have been in power." The ruble has gone from 27 to the dollar to 350. Mulford is also the fellow who nudged Treasury Secretary James Baker III into a fight with the Bundesbank in October 1987, which precipitated the Crash of '87. Nick Brady just loved him. (JW)

CAPGAINS WATCH: This morning's "Washington Wire" in The Wall Street Journal signals a rethinking in the Clinton camp on the capital gains tax. The Journal's Washington Bureau, dominated by partisan Democrats, now tells us "Clinton's victory enhances chances for a capital-gains tax cut." The rationale is that Clinton's willingness to raise income taxes on the rich, with a new 36% bracket, enables him to push for a cut in capital-gains taxes for new businesses," and "despite his soak-the-rich rhetoric, aides say Clinton never ruled out a broader capital-gains tax cut." This is all so much baloney. The Democratic leadership has known all along that a capgains cut would invigorate the economy, but denied it to President Bush in order to undermine his administration. They simply could not believe their good luck in having Nick Brady and Dick Darman so willing to be undermined. The capgains cut "for new businesses" is a silly one that we believe will probably be dumped in Congress in favor of one that will work, as the Clinton camp will want to get it right the first time. NASDAQ's big movement reflects heightened chances of a broad-based cut and indexing at least of future gains. (JW)

MEXICO'S PESO has been stable against the dollar since October 20, prompting us to do a new analysis of the currency. Contrary to the universal impression, including ours, it appears the October 20 decision to increase the peso's band of fluctuation against the dollar didn't represent a devaluation after all. This is good news for the Bolsa. New research on our part, in fact, shows that the peso price of gold has been more stable than the peso-dollar parity during the past two years. Mexico's central bank has been correcting for errors on the side of inflation or deflation on the part of the Fed, with the result that the volatility of the peso gold price has been lower than its volatility with respect to the dollar. Our model of Mexican stock prices shows that the peso's stability against gold is an important factor determining the Bolsa index, along with the behavior of U.S. low-cap stock prices. Mexico's central bank may simply require more flexibility in managing the peso-dollar rate in order to correct for errors in U.S. Federal Reserve policy reflected in changes in the dollar price of gold. In the hands of Mexico's able central bank President, Dr. Miguel Mancera, the increased band of fluctuation might turn out to be an advantage rather than a disadvantage. We will continue to watch how the peso rate evolves; one test will be whether the central bank is willing to push up the peso-dollar rate when the dollar price of gold rises back above $350. Unhappy as we are with Mexico's backtracking from urgently-needed fiscal reforms, sound money represents a plus. (DG)

CLINTON LAROUCHE: We're getting questions on whether Bill Clinton is really anti-Keynesian. Yes, yes, yes. His economic program is remarkably similar to that of Lyndon LaRouche, the incendiary political activist and erstwhile presidential candidate who now resides in a federal penitentiary. Keynes believed a sluggish economy could be enlivened by having government-run budget deficits to have people hired to dig holes and fill them up, with a "multiplier effect" following this "pump priming." Keynesian dinosaurs like Charles Schultze still believe this baloney. LaRouche championed a commodity standard for monetary policy, eschewing monetarist dogma. And like Clinton he favored an entrepreneurial government, which would not tax and spend, but would borrow and invest in high-tech projects that would, in his view, have a positive return on investment. LaRouche favored government investment in nuclear fusion and desert irrigation schemes. Clinton has bought into bullet trains and infrastructure. LaRouche got into trouble with the law by milking contributions for his political ambitions from little old ladies, at least one character flaw Mr. Clinton does not have. (JW)

TRIP TO CHINA: I swore that if Bill Clinton were elected President I'd leave the country. And so I am, but just for two weeks, to poke around Hong Kong, Macao, Thailand, Quandong Province and Shanghai. I'm accompanying two clients, Ted Forstmann of Forstmann, Little & Co., NYC, and Julian Robertson of Tiger Management, NYC. They're going window shopping. I'm going to assess the political climate and economic policymaking, my first in China proper since 1986. My combined investment portfolio, including Polyconomics pension fund, is now 22% in Hong Kong and China, exceeding my 17% in Mexico. I'll be back in New Jersey November 23 and have a report to you after Thanksgiving. I don't expect Clinton will deliver a Treasury Secretary until the first week of December, so I may as well be in China. (JW)