Monthly Miscellany Jude Wanniski February 28, 1994

BONDS: Former Fed Governor Wayne Angell, whose last Open Market Committee meeting was in December, spent the last two weeks on a whirlwind speaking tour of Wall Street -- delivering a bear message that may have contributed to the recent selloff in bonds. It has been no secret that Angell had been the most hawkish voice at the Fed, citing the rising price of gold as the most reliable early indicator of inflation. He continues to argue that Alan Greenspan has to act more decisively to persuade bond buyers that he is going to squeeze incipient inflation out of the system, that he believes Greenspan will try to merely talk the bond market up, and that this ain't enough. Gov. Larry Lindsey, who had been arguing a line almost as tough as Angell's, today says he hopes the quarter-point tightening will prove to have been sufficient, although he still suspects it might not. The tone in the bond market has improved a bit with the emergence of gold as a key indicator at the Fed. [See Keith Bradsher's fine account in today's business section of The New York Times, "Fed Relying On Intuition on Rate Policy," and the Journal's lead editorial, "Greenspan Takes the Gold."] Greenspan, though, has to be able to steer the Fed into the right combination of talk and action. If, for example, he sets a gold price ceiling at $390, he has to be able to persuade his colleagues to punish the disbelievers when they test that level. Can he? His next public shot at developing his arguments will be at the forthcoming leg of his Humphrey-Hawkins testimony, before Senate Banking, which should occur in the next few weeks. These are uncharted waters, but Greenspan does have command of the issue and a golden opportunity to make significant headway toward a gold-target standard.

FED OPENINGS: The Wall Street Journal's report this morning on the likelihood that CEA member Alan Blinder will be named Fed Vice Chairman did not do him any good at all. The headline itself probably gave President Bill the willies: "Probable Fed Nominee Blinder Stands In Sharp Contrast to Inflation Hawks." There are some juicy Blinder quotes from days of yore clearly indicating he thinks a little inflation serves to grease the wheels of commerce, a notion Greenspan denounced in his House Banking testimony last week. Also, WSJ reporter David Wessel makes it clear that if Blinder gets the vice chairmanship, he can't expect to move up to the chairmanship in '96, when Greenspan's term is up, that it will almost surely go to Bob Rubin. Blinder might prefer to stay where he is or go back to Princeton. We still think Rubin should take the vice chairmanship now, both to learn the ropes and also remove himself from the White House for two years, avoiding the inevitable complaints that would be made in '96 if he was named Fed chairman so close to the elections. In another weekend development, Senate Minority Leader Bob Dole told CNN's Evans & Novak show that he hoped the President would name an African American or Hispanic American to one of the Fed seats now open. He suggested Bob Wilson of St. Louis, who is now at Citicorp in NYC in international finance. A Democrat who worked in the administration of NYC Mayor David Dinkins, Wilson is the son of Margaret Bush Wilson, former president of the NAACP. Members of the Congressional Black Caucus are urging the President to name a black, as there has not been one at the Fed since 1986, and Wilson's is one of the names they are advancing. Most importantly, Wilson is not a Keynesian Phillips Curver and would fit in well with the Greenspan Fed, which is the reason Dole could back him with enthusiasm.

JAPAN BASHING: The G-7 finance officials got behind the hard line of Treasury Secretary Lloyd Bentsen in Germany this weekend, rebuffing Finance Minister Fuji's argument that Japan is doing its best to stimulate its economy. Tokyo's $145 billion stimulus plan, which includes tax cuts, is "insufficient," according to Bentsen, who refused to shake hands with Fuji for the cameras, according to the Japanese press. Both IMF Managing Director Michel Camdessus and British Chancellor of the Exchequer Kenneth Clarke urged easier money by the Bank of Japan, but of course this flies in the face of the theory that a cheaper yen would increase the trade surplus, by making the yen weaker and exports cheaper. There is a complete absence of leadership in the G-7, which is why it is tied up in neo-Keynesian knots. Bentsen has become a puppet of Deputy Treasury Secretary Roger Altman, a Friend of Bill's, who is already measuring the size of the Secretary's office. Altman is part of the gang that brought on the financial convulsions of the last quarter century -- the Blackstone Group of NYC and the Institute for International Economics in Washington, DC, with C. Fred Bergsten as executive director. Former Nixon Commerce Secretary Peter G. Peterson chairs both groups. All of our problems can be solved by devaluing the dollar, raising taxes to balance the budget, and bashing Japan. Reagan turncoat David Stockman is at Blackstone, where he was an Altman buddy. 

TRADE PLUS: MIT's Paul Krugman, a neo-Keynesian guru in trade theory, writes an important op-ed in today's Wall Street Journal, "Competitiveness, a Dangerous Obsession," which completely cuts the ground out from the Japan trade bashers in the Clinton administration. Among them are Ira Magaziner, Robert Reich, and Laura Tyson, whose conclusions begin with the assumption that nation states compete against each other in the economic sphere, which means their governments have to get involved in trade disputes. Krugman's arguments are made in a demand framework, but are largely consistent with our supply model. Businesses compete, not countries. "International trade...is not a zero-sum game. When productivity rises in Japan, the main result is a rise in Japanese real wages; American or European wages are in principle at least as likely to rise as to fall, and in practice seem nearly unaffected. The moral is clear: While competitive problems could arise in principle, as an empirical matter major nations of the world are not to any significant degree in economic competition with each other." The most wholesome comments from Krugman are those suggesting a nation's trade surplus "may be a sign of national weakness; a deficit, a sign of strength." Art Laffer and Bob Mundell taught me this 20 years ago and I've watched the world work accordingly. Will Krugman's piece have any effect on the Clinton Administration's Japan bashing? It can't hurt, especially if someone in the White House brings it to the President's attention. David? David Gergen? Are you there?

RUSSIA BASHING: Hurray for New York Times editorial page editor Howell Raines for his editorial today, "Russia's Mission: The Struggle Within." It is the smartest commentary on U.S. relations with Moscow that we have read in many months, warning against the "unreconstructed cold warriors in Washington" who see in Boris Yeltsin's intervention in Bosnia "a dangerous reassertion of Russian nationalism." Instead, it argues for "a cool appraisal of what Mr. Yeltsin is up to," seeing "his modest sortie in Bosnia" as "designed to defuse nationalists who would prefer massive intervention on Serbia's side." Exactly. "Washington may be wary of his support for Bosnia. But it cannot exclude Moscow from the making of a Bosnia settlement. To isolate Russia or treat it like a defeated power would only bolster the nastiest of nationalists." The unreconstructed cold warriors in the GOP are making a mistake in misreading the sentiments of the American electorate. The Senate GOP's 31 votes against the nomination of Strobe Talbott as Deputy Secretary of State was backward looking, blasting him for being "nice" to the Russians in the past, as if being "nice" to them in the future is automatically against U.S. national interests. Talbott's only problem is that he defers to Treasury Undersecretary Lawrence Summers, a shock therapist, on economic policy. If he split with Summers, which he had come close to doing, he could help Russia move in a positive economic direction -- the only way to strengthen the democratic forces in Russia. 

BOCA NOTE: We had a grand time in Boca Raton, Florida, at our 10th annual client conference over the weekend. The best news was from Bob Dole and Mike Milken, both of whom have had bouts with prostate cancer, both of whom now report zero PSAs. They both look terrific. Congratulations and continued good health!