Now, Back to Greenspan
Jude Wanniski
November 19, 1993


The sagging financial markets this week provide a rude reminder that, for all its promise, NAFTA will not juice up our $6 trillion national economy anytime soon. In the here and now, the real world turns primarily on the one agent that realistically has the leverage to move this giant, clunking, production machine: the Federal Reserve Board. Specifically, Alan Greenspan. In the last month, the trend in the bond market has been stinko and so has the broader stock market; NASDAQ peaked at 787 on October 15, but has followed the bond trend and now stands at 752. The financial writers continue to advise us that bonds are suffering because the economic outlook looks so robust, but that's not what the low cap stocks are telling us. The economy stinks and it does not look like it is getting better. There are various Federal Reserve districts -- Philadelphia and Richmond in particular -- where a pickup is being seen or imagined. Otherwise, there is no evidence of the kind of dynamism that warrants a tone of optimism about the economy's future, and the slide in bonds and NASDAQ is wiping away the good face everyone was putting on for the sake of NAFTA.

Greenspan could, if he wished, give a firmer tone back to the bond market, which in turn would revive the fortunes of those enterprises that rely on access to low-cost capital. This would require that he take on a much more aggressive role than he has in educating the bond market, by which I mean letting it in on what he's really thinking about. The creditors of the United States are easily spooked, and unless they have constant reassurance that they are not going to be cheated out of interest or principle, they will retreat as they have been. The price of gold, at $378, is drifting higher, not because there is a shortage of bullion, but because there is increased nervousness about Greenspan's conduct of monetary policy. What's he thinking about?

Is growth bad for bonds? If Greenspan thinks so, that would be bad for bonds because it would mean he would be prepared to shut off growth to protect bonds, when in fact bonds like robust non-inflationary growth. If he thinks growth is good for bonds, that might be bad for bonds, if the market thinks he thinks easier money is good for growth. Confusing? Yes, because America's creditors really do not want Greenspan to be thinking about growth at all. They want him to be maniacal about maintaining the purchasing power of the U.S. debt they hold, so they won't be cheated on interest or principal. The more maniacal he is, the happier the creditors will be, which translates into a lower cost of capital, rising prices of NASDAQ stocks, and faster, non-inflationary economic growth.

Now, if Professor Greenspan gave me a quiz and I wrote the above paragraph, he would not only give me an A+, he might also write a nice note to my mother. Unfortunately, the Professor assumes the creditors should know this is his view of their interests, and that those who bet against him ultimately will lose and be sorry they did. This may have something to do with the years he spent on Wall Street, when, in trading commodities himself, he came to see commodity traders as speculators. The market for U.S. bonds is different, however. It is not a place where speculators should be seen as getting their comeuppance if they don't pay attention in class. We're talking about the obligations of the nation, its monetary standard, and the integrity of its unit of account. There are a lot of losses incurred by the nation while the speculators are awaiting their comeuppance.

It would be better if he thought of bond buyers as sweet old ladies in rocking chairs, who are wondering if their life savings in 30-year bonds are going to be devalued because House Banking Committee Chairman Henry Gonzalez is trying to strip the Fed of its independence. Or, they realize Fed Governor Wayne (Inflation Hawk) Angell is soon leaving the Fed, and may be replaced by a certain White House economist who would get an "F" on Professor Greenspan's quiz. Or, Greenspan may think he's going to be rescued by a sudden increased demand for liquidity in the market, which would knock down the gold price, boost bonds, and send the NASDAQ back toward 800. But the rescue does not materialize. Or, these sweet old ladies may worry that because he's not saying what he's concerned about, he may not be worried about them. All this nervousness would be enough to send the 30-year bond yield from 5.78% to 6.24%.

Greenspan could be rescued, but that would require action on the fiscal front, where all is silence now except for the controversy surrounding the Penny-Kasich deficit-reduction plan. Conservative Republicans are now complaining that President Clinton is welshing on his promise to cut another $100 billion from the budget over the next five years, turning thumbs down on the plan of Reps. Penny and Kasich. The maneuvering is a story in itself, but of little consequence to Greenspan's problems with the little old ladies. To get some juice into the economy requires action on the capital gains tax, at a minimum its indexation. It's a perfect time for Republicans to begin talking about this issue, putting it into play while everyone goes home on holiday. If President Clinton wants to have a follow-up bipartisan success on the economy, here's a perfect place to start. If cutting tax rates between the United States and Mexico will be good for competitiveness, as the White House has learned to argue, how about reducing the tax on capital? Senate Majority Leader George Mitchell is getting along so well these days with Senate Minority Leader Bob Dole, why, he might decide, what the heck? 

In any event, we can all expect this issue back on the table shortly. Immediately, if not sooner, as the growth Republicans in the House and Senate jump on it to keep the ball rolling, after the NAFTA vote. House Minority Whip Newt Gingrich, NAFTA's biggest winner in Washington on my scorecard, is certainly going to be elevating the domestic economy and entrepreneurial capitalism as fertile ground for further teamwork with his pal, the President. So will Rep. Dick Armey, Jack Kemp, Sen. Phil Gramm, et cetera. The spirit of Reaganism is back in town, and the deeper we get into 1994, the closer to the House and Senate elections, the more we will see the possibilities that this NAFTA vote has opened. As long as the GOP leadership doesn't mind seeing the economy improve and Bill Clinton take credit, the potential is there.

Meanwhile, I will continue to encourage Alan Greenspan at every opportunity to take pity on the worried old folks, hold their hands, and assure them everything's going to be okay in the bond market. And if nothing momentous occurs to us before next Thursday, we wish you all a Happy Thanksgiving. In Mexico and Canada too. What the heck.