The latest trial balloon from our young President -- a laughable value-added tax to pay for a laughable health reform plan -- has pushed the Belt way Establishment to the edge of embarrassment. It is finally beginning to dawn on the permanent government, which includes the Washington press corps, that the President's "forty-something" team has been living in a childlike fantasy land. As Senate Minority Leader Bob Dole observed before the Easter recess, when Congress returns next week it will finally be using "real bullets." As it is, Clinton suffers from the lowest approval rating (49% by the latest Newsweek poll) and the highest disapproval rating of any new president since these polls began. At least a half-dozen conservative Democratic senators are praying for a pretext to withdraw support from his economic program. At some point very soon, it should be clear to the President that he has no choice but to turn to the grown-ups in town -- Treasury Secretary Lloyd Bentsen, Senate Finance Chairman Pat Moynihan, and Fed Chairman Alan Greenspan — to pull things back to reality.
Bentsen has maintained such a low profile so far that it began to appear he would not be a strong finance minister after all. The quiet death of the Investment Tax Credit, though, betrays the canny Texan's influence. To all the young academics around Clinton, including Robert Reich, Laura Tyson, Alan Blinder and Lawrence Summers, the ITC was an indispensable component of a growth package. We reported last fall that Bentsen ridiculed the ITC in private much as he loyally supported it in public. When his successor at Senate Finance, Pat Moynihan, chopped the ITC out of the Clinton package, Bentsen spent no political capital to save it. Instead, he now says some substitute will have to be found to encourage growth through investment. Like Moynihan, Bentsen has always favored a lower capital gains tax as opposed to an ITC. For obvious reasons, neither man will say this in public. If the Republicans offer to trade action on capgains for a vote on the Clinton stimulus package, Bentsen would instantly become the arbiter of economic policy inside the cabinet, and Fed Chairman Alan Greenspan could employ his influence with the White House in favor of a capgains tax reduction. Senate Republican strategists point out that such an initiative might come at any time between Monday, when Congress returns from recess, and June, when the House-Senate reconciliation bill comes under debate. White House attempts to lobby Republican Senators to break with the filibuster have failed and Mr. Clinton now says he's willing to compromise with the GOP through Bob Dole, who is in the driver's seat. A consensus is building in Washington that somebody has to save the USA from what The New Republic, the Beltway's most influential political periodical, now calls the scourge of "Clincest," i.e., the childhood pals of Biliary. (Jude Wanniski)
BORIS YELTSIN, trying to avoid defeat in the April 25 referendum, Wednesday decreed that there will be no further increases in energy prices to Russian consumers — even as the entire economy slowly grinds to a halt because of the price of crude oil. Oil fields are shutting down because Russian industries and refineries can't afford the price of R25,000 per metric ton, up from R120 two years ago on the insistence of Western financial institutions. It is shameful that the entire Western press corps has been taken in by a handful of incompetent economists at the IMF, the World Bank and U.S. Treasury. The New York Times, in the lead, this morning blares "7 NATIONS PLEDGE $28 BILLION TO ASSIST RUSSIA," a move to impress Russian voters. The Times does note "Doubt Is Expressed That Moscow Is Able to Tighten Its Belt." The World Bank refuses to release credits to Moscow unless it is given a firm timetable of further oil price increases that would bring the price to R100,000. This would mean that Russian consumers could buy all the gasoline and oil they could find at the cheap prices Yeltsin has decreed while refiners can't afford to buy crude to produce it. Unless the crude price goes down instead of up, there soon will not be a drop. U.S. Treasury Undersecretary Larry Summers and other western economists have been blasting Viktor Geraschenko, head of the Russian central bank, for increasing the money supply to prevent unemployment. Now, Yeltsin is blasting Geraschenko for complying with these demands, withholding new printing press money for payment of teachers and state employees. "This is a mine deliberately placed under the referendum," Yeltsin complains. Meanwhile, official Washington continues to congratulate itself on helping Yeltsin preserve democracy. It would be hilarious if it were not so sad. (JW)
RENEWED GREENSPAN BOND RALLY: As the long bond yield topped out April 2 at 7%, we wrote, "There is very strong statistical evidence that the rise in the gold price stemmed from expectations of a falling dollar, rather than any change in U.S. money market conditions/ adding that bond prices would recover rapidly if the Greenspan Fed failed to validate those expectations. By arresting the rise in the gold price, the Fed signalled the market that it would maintain the dollar's purchasing power in real terms, and the market promptly bid the long bond back up. Our bond-yield model shows that bond investors now view the dollar's weakness on the foreign exchange market as transient. As the dollar fell against the yen during the past ten days, the market bought long-term U.S. bonds at lower yields, expecting future capital gains in currency terms when the dollar recovered. (David Goldman)
HONG KONG RALLIES ON BRITISH SUBMISSION: Hong Kong's spectacular rally this week stems from a drastic shift away from confrontation in London's diplomacy toward China. Hong Kong governor Chris Patten, while in London to rally support against Beijing, was confronted with a fait accompli when the Foreign Office and the Chinese Foreign Ministry simultaneously announced that Sino-British talks about Hong Kong will resume on April 22. They will be held between the Chinese government represented by deputy Foreign Minister Jiang Enzhu and the British government represented by ambassador to Beijing Robin McLaren. The Hong Kong government is specifically excluded from the talks except for three individual officials who will be there under the circumscribed status of "providing support to the ambassador." According to the Foreign Office, Britain will bring "no preconditions" to the talks, i.e., the Patten reform proposals will not be the subject of discussion. The British statement in part reads: "The Chinese and British sides have agreed that the government representatives of the two countries will, starting from April 22,1993, hold talks in Beijing on the arrangements for the 1994-95 elections in Hong Kong in accordance with the Sino-British Joint Declaration, the principle of convergence with the Basic Law and the relevant agreements and understandings reached between China and Britain."
This satisfied every one of the preconditions that Beijing had set for the talks. The whole development is a rout for the Patten strategy and the first indication of a serious strategic shift of British diplomacy away from confrontation and toward accommodation with a resurgent China. This shift was probably encouraged by London's coming to terms with China's political consolidation at the recently concluded National People's Congress. The tremendous buildup of China's politico-economic momentum in the Asia-Pacific region, coupled with Washington's indecisiveness respecting that part of the world, must have led the Foreign Office to conclude that Britain's interests are best served by accommodating Beijing rather than confronting it. The Jardine Group's dramatic shift in favor of Beijing must have also helped: On March 29, senior Jardine officials met with China's Vice-Minister of Foreign Trade and Economic Cooperation and came out of the meeting vowing to "correct Jardine's mistakes in the past." When the "mistakes in the past," i.e., Jardine's support for Chris Patten, were rectified with the April 13 announcement of the Sino-British talks on Beijing's terms, the Hang Seng index rose 5.6%, with Jardine's stock up 12%, in one day. (Criton Zoakos)
SPECIAL NOTE ON RECOMMENDED READING: The April Recommended Reading, mailed this week, contains a series of work-in-progress papers on "New Jersey School" analytics. These include a rigorous demonstration that gold volatility measures the inflation risk premium in long-term bond yields between 1978 and 1992 by Evan Kalimtgis; a calculation of the changes in the real interest rate in long-term bond yields between 1990 and 1993 by David Goldman; and an exchange between American University professor George Ayittey and David Goldman on the conceptual foundations of supply-side economics. While these papers do not pertain to political-economic events of the moment, we believe they represent groundbreaking work of vital interest to our clients.