Miscellaneous Ups and Downs
Jude Wanniski
February 23, 1994


GREENSPAN UP: Fed Chairman Alan Greenspan's House Banking testimony yesterday was nothing less than historic. By advising the world that he considers the price of gold one of three early warning signals on inflation (the yield curve and foreign exchange the others), Greenspan has given the bond markets a clear benchmark for sorting out the Fed's intentions. He said as explicitly as he could that the economy can grow as fast as it can, and the Fed will do nothing to rein it in if the gold price is not climbing. The financial press will henceforth make the connection, watching every wiggle in gold, and the bond market will adjust as well. If the gold price begins sliding, as it should if confidence feeds back into dollar assets, market commentary will speculate on whether Fed funds might not come back to 3%! Greenspan could not have been better in his exposition. His discussion of gold in response to a question from Rep. John LaFalce [D NY] was flawless, a lecture on the unique attributes of gold that will at long last trigger a debate on the information value of the gold price that will inevitably lead to a reestablishment of the gold/dollar link. At one point Greenspan was so bold as to tell the committee that he personally favored a gold standard, although carefully acknowledging that his views have evolved over the last two decades. Former Fed Governor Wayne Angell, who had no idea what Greenspan would say, sat in on the hearing, beaming throughout the answer to LaFalce. On CNN's Moneyline last night, Angell was almost ecstatic in his praise for Greenspan, well aware that Greenspan has now changed the terms of debate. If there was to be any chance of the 30-year bond this year hitting our forecast of 5.5%, Greenspan had to do what he did. We were incorrect in assuming there would be a Greenspan followup in Senate Banking this week. Greenspan will return for that round of Humphrey-Hawkins testimony in early March, which will allow time for the discussion to ripen. Greenspan's appearance tomorrow before Senate Banking is an oversight session on the Resolution Trust Committee, which will explore the President's Whitewater investment. It could produce fireworks, but more likely will be a dud. 

RUSSIA DOWN: Yesterday's arrest of a senior CIA official on espionage charges was transparently timed to embarrass Russia at the very moment it was savoring its success in Sarajevo. The CIA has had Aldrich Ames in the bag for more than two years. It could have waited another two weeks or two months or two years, but the Cold Warriers in the diplomatic and intelligence community were so chagrined at Moscow's brilliant maneuver to defuse the timebomb in Sarajevo that they had no choice but to play their trump card yesterday. Abe Rosenthal of The New York Times had it exactly right yesterday when he noted that the folks who wanted to bomb the Serbs were disappointed with the Russian maneuver. These are the dark forces inside our political establishment who cannot get used to the idea that the Russians are not our enemies anymore -- and that there is nothing left for them to do. They would rather a bloodbath in Bosnia to demonstrate that the U.S. is king of the world. Of course, this is how big wars get started. The CIA is an anachronism, but as it controls $30 billion in taxpayer funds, it has to generate conflict in order to justify itself. The Republican Party, which kept itself glued together in the Cold War, is being swept along by the international bureaucrats who are playing their Cold War chess games. Former Defense Secretary Dick Cheney seems to be the only key Republican around who worries about raising the level of commitment and conflict in the region. Dr. Fred Ikle, who was Defense undersecretary in the Reagan administration, is about the only intellectual among the old cold warriers who wants to treat the Russians as allies. 

JAPAN, REALLY DOWN: Commerce Undersecretary Jeffrey Garten is on a two-week tour of Asia spreading the disgraceful message that Asian businessmen should not worry about the U.S. bashing of the Japanese, because Washington draws a sharp distinction between Japan and the rest of Asia. According to the Japan Digest this morning, Garten says Asian leaders should identify with U.S. frustrations, because they have the same difficulty in penetrating the Japanese market. Like the U.S., almost every Asian country runs a deficit with Japan, he said, adding: "We believe we are at a turning point in our relationship with Japan... The closed nature of Japan is a drain on the world economy. Tokyo is taking more from international markets than it is returning." What a jerk. The Department of Commerce has been a mercantilist bastion from the days when Herbert Hoover was its Secretary, but we can't recall anything more ignorant than this statement by Garten. If our international bureaucrats can't get a hot war started in Bosnia, why not a trade war in Japan. Hey, Japan is a prime source of capital to all of Asia, which is why it runs a trade surplus. It gushes finished goods and in exchange accepts debt and equity. We don't expect members of Congress to understand that when we buy a Japanese widget for $1, Japan can only spend that $1 here, to buy American widgets or American stocks, bonds or real estate. Every dollar we spend comes back to the United States. Every one, to the last penny. We are embarrassed to have such a complete ignoramus serve as a senior official of the Commerce Department. 

DONALDSON UP, BBA DOWN: This is surely cause for celebration. Sam Donaldson said something so smart on Sunday's Brinkley Show, about the Balanced Budget Amendment, that we wrote him the following note: "Congratulations! You had exactly the right argument against George Will yesterday on the BBA: Its underlying assumption is that the American people are not smart enough to send men and women to Congress who will balance the budget. Doesn't Will have confidence in the body politic? You were right, too, to argue that the line item veto and term limits are in a similar vein. They assume our democracy is flawed -- that the political marketplace is inefficient. When the marketplace is inefficient, we must turn power over to an elite who will decide what the representatives of the people can do and cannot do, or change the Constitution to protect the people against their representatives in Congress. I haven't the slightest doubt that if we had a national initiative and referendum process, the American people would soundly reject a balanced budget amendment. Republicans who campaign on it do so without conviction, responding to public-opinion polls that are meaningless on such matters. I doubt there are more than a handful of Senators who think it's a neat idea." We don't think the BBA will pass the Senate this week, because most of those who publicly say they favor it don't want it to pass. If it looks like it will, some votes will switch to keep it from happening. 

CUBA UP: Have you noticed a big push in the press corps on behalf of normalization of relations with Fidel Castro & Cuba? With Vietnam now part of the family of nations again, the Cubans are itching to get the embargo lifted. We are part of the push, having been persuaded by our friend Rep. Charles Rangel [D NY] that Fidel is prepared to consider a creative scenario toward that end as long as it doesn't involve shock therapy. Which is fine by me. We have had several meetings with the Cubans. Irene Philippi de Soto of our staff has just returned from a week in Havana, having met with the relevant economic officials of Castro's cabinet. The progress has been so encouraging that I'm now awaiting word on a meeting with Fidel himself in Havana. A representative of the Cuban government will be in Boca Raton this weekend, at the 10th annual Polyconomics Supply Side Festival, with Evans & Novak.