Notes on the Revolution XX/Dollar/Yen
Jude Wanniski & David Gitlitz
October 2, 1995



CAPITAL GAINS: The recent uncertainty on Wall Street, especially the weakness on NASDAQ, probably does not reflect concern that capgains is in trouble. If it were, there would be a major sell-off. As Bob Novak reports in his syndicated column today, even President Clinton last week “quietly abandoned the relentless Democratic bashing of capital gains tax cuts over the past seven years.” A White House budget deal with the GOP congressional leadership is clearly in the works. In all the talk of compromise coming from the Senate, though, it is not clear that retroactivity to January 1 will survive. The smart money that has bigtime high-tech capgains this year is still shorting against the box, to cash in after the first of the year. Thus the weakness on NASDAQ. If the GOP does not deal away retroactivity, the smart money will of course rush to cover its shorts in this tax year, extending the boom on Wall Street. The President will be told by his economists and House Minority Leader Dick Gephardt to resist retroactivity, on the grounds that it’s costly and won’t have any positive economic effects, because the investments have already occurred. They would be wrong on both counts. The increased capitalizations in 1995 would give the entire economy a year’s head start on expansion. Expansion plans would be put in place immediately instead of waiting for a January 1 starting gun. The Christmas season would be much stronger and tax revenues at all levels of government would enjoy an unexpected last minute rise. Private pensioners would benefit this year instead of having to wait a full calendar year for their wealth to be marked to market. We still think this will survive the deal-cutting process because of the promise of House Ways & Means Chairman Bill Archer, backed by a letter signed by several key Senators including Majority Leader Bob Dole. Prospective indexation of capgains, which passed the House as part of Newt’s Contract, is less likely to survive.

TRAINWRECK: Newt Gingrich continues to insist there will be no permanent increase in the debt ceiling until there is a budget deal. There is little bite behind his bark anymore as it has become too clear that Newt could not risk a default, having become so thoroughly identified with the threat. On This Week with David Brinkley yesterday, he noted that the government operated for 11 days without a required increase in 1981, and that the bond market strengthened over that period. Treasury was, of course, covering its credit needs by juggling the books via the Social Security trust funds, a loophole that has since been closed. Roger C. Altman, who was deputy Treasury Secretary in the first two years of the Clinton administration, made all the right arguments against a Gingrich default in the Sunday New York Times. Altman, ironically, is a partner of Wall Street’s Blackstone Group, a primary supporter of the currency devaluationists at the Institute for International Economics. Devaluation is, of course, the sneaky form of bond default.

COLAS: The newest Beltway sneak attack is directed at the pocketbooks of our retired parents and grandparents. They are being told that due to arithmetic mistakes in computing the Cost of Living this past quarter century, they are getting too much money in their Social Security checks. This is a Big Lie, but the Big Guys in both political parties have decided it is a clever way to have a tax increase without saying so. In this morning’s Outlook column of The Wall Street Journal, we find the Congressional Budget Office estimating that a one-point downward adjustment in the Consumer Price Index will save $281.4 billion over a seven-year stretch. Of that, $101.6 billion comes in reduced Social Security outlays. Of course, this will also mean lower wages for workers whose contracts are tied to the CPI. The CPI, though, has risen only 2.7 times in the last quarter century. The price of gold, always the best proxy for the general price level over longer stretches of time, has risen 11 times in that period. This suggests the CPI has not adequately reflected the cost of living, let alone having overstated it. Sen. Daniel Patrick Moynihan is eager to embrace the idea, hoping to transfer the savings from the elderly to the needy -- robbing widows to pay orphans. The GOP leadership, urged by Fed Chairman Alan Greenspan, seems happy to oblige. They are trying to persuade President Clinton to go along with the swindle. When the issue was first raised early this year, the only Beltway voice raised in opposition was that of Empower America, in a statement by its chairman at the time, Malcolm S. Forbes, Jr., who knows a sneaky tax increase when he sees one. 

DOLE: It is now conventional wisdom that GOP presidential frontrunner Bob Dole can’t beat Bill Clinton, because the American people will not trust Dole and Gingrich to run the country -- an argument we have been making for several months. Oddly enough, the Republican right wing, which has never trusted Dole, now is being driven toward his corner. This is because of the sudden fear that General Colin Powell will throw his hat into the ring, win the nomination and the presidency, and disrupt their plans for conservative social engineering. This isn’t rational: You can put Powell, Jack Kemp and Steve Forbes in a room, and they would have a party by themselves -- political blood brothers. But the far right, like the far left, has a greater propensity to be driven by fear than those at the radical center. Movement conservatives would prefer a losing Dole candidacy to a White House in Powell’s hands, knowing Powell would fight the demolition of the New Deal and its social safety net. On Face the Nation yesterday, Dole exuded warmth and confidence. With California Gov. Pete Wilson out of the race and Sen. Phil Gramm going nowhere, Dole can now afford to be kinder and gentler, wooing Colin Powell. If Powell can be tickled into staying out of the race, Dole surely believes the nomination is his.

Jude Wanniski


After its enormous success in driving the yen under ¥100 per dollar by expanding supplies of yen liquidity, the Bank of Japan appears to be in a holding pattern, maintaining the currency right around the penny level. If anything, for the last few sessions the BoJ’s domestic operations have been mildly restrictive, including a drain of ¥1 trillion Monday. Focusing on the BoJ’s domestic transactions can be somewhat misleading during the current period, though, because the central bank has been creating yen liquidity at a brisk pace through unsterilized foreign exchange intervention, which does not expand its balance sheet. But even in the foreign exchange markets, the Bank has been notably less aggressive in the past week, appearing content to allow the dollar to trade somewhat under ¥100 at times. At the moment, the dollar is benefiting from expectations that the G-7, gathering in Washington late this week, will state its desire that the dollar’s recent strengthening be maintained. Traders are understandably reluctant to establish short positions in the dollar during such a period. Once this speculative uncertainty is resolved, it will be incumbent upon the BoJ to ensure that the yen does not now reverse course. The BoJ would do so by resuming creation of liquidity and helping heal the deep fissures in the Japanese financial system caused by its deflationary policies of the recent past.

David Gitlitz