A Few Thoughts for the Weekend Jude Wanniski June 27, 1997

GREENSPAN: The gold price continues to edge down as the economy expands, demanding more liquidity. At $336 it is at a four-year low. The Fed FOMC meets on Tuesday and Wednesday next week, and almost certainly will not raise rates. Alan Greenspan’s larger problem is how to turn market expectations in the direction of a cut in the fed funds rate, which is the only way under current Fed operating mechanisms that more liquidity can be supplied to the banking system. As gold inches toward $330 under these market conditions, a successful tax bill signed by the President will only increase demand for liquidity. Greenspan must find some way to educate the market that the tax cuts will expand productivity and raise national living standards -- as long as they are not offset by a monetary squeeze. If he doesn’t, the fiscal expansion will have to struggle against monetary deflation. 

TAX BILL: The White House and Congressional Democrats are preparing the country for a veto of the tax bill that will emerge from a Senate-House conference. It practically does not matter what is in the tax bill. The President will be pushed to veto it in order to get a little bit more for his team on a second writing of the bill. The Republicans have maneuvered themselves into this fix by signaling an earnest desire to please the President -- to do what it takes for him to sign the bill. This is House Speaker Newt Gingrich’s continuing problem. The Democrats are almost certainly amazed at their good fortune, in dealing with a GOP whose principal leader is afraid of his own shadow. Neither the President nor the Democrats can be blamed for their behavior. As long as the Republicans will not get rid of Newt, the millstone around their neck, they are forced to play a defensive strategy even though the electorate has twice in a row given the GOP control of the government. The Senate version which will pass today will not be as good as the House version, because the Senate has only $70 billion to work with on tax cuts, leaving out $15 billion in tobacco tax hikes. The Democratic flunkies in the press corps are now arguing the economy is growing so fast and the stock market soaring so high that there is obviously no need to cut capgains. There will be Republican Senators who will take that argument seriously in trying to get their hands on some of the capgains cut, watering it down further than it has been thus far. A 20% rate is not nearly as effective as the 50% exclusion first proposed, as the rate cut does not offset the negatives of an Alternative Minimum Tax the way an exclusion would.

NEXT WEEK: I’m going to Washington Monday for several meetings with various politicos and will attend the Hong Kong party at the Chinese Embassy Tuesday night, as guest of Ambassador Li Daoyu. On Thursday, I head for Chicago to attend the Nation of Islam’s conference on the Future of Islam in the 21st Century as guest of Min. Farrakhan. The conference may be thought of as the Islamic equivalent of Vatican II, with Min. Farrakhan attempting to bring reconciliation to the fractured Islamic world, then attempting an Islamic ecumenical reconciliation with the Jewish and Christian faiths. Islamic scholars will attend from around the world. Note in today’s WSJournal that there are the first political stirrings of reconciliation between Muslims of Iran, Iraq and Syria. Remember the date: January 1, 2000. The Pope, Jewish, Christian and Islamic leaders from around the world will meet at the base of Mt. Sinai and celebrate their common heritage with the laws of Abraham and Moses. You heard it first right here.