Controversial Topics Jude Wanniski July 7, 2001

RUSSIAN GOLD STANDARD? I may be completely mistaken, but it looks like the Bank of Russia is taking the first steps to putting the ruble on a gold standard. The chairman of the bank, Viktor Geraschenko, has decided to put into general circulation as legal tender gold coins originally minted for sale as souvenirs at the 1980 Olympics. I have known Geraschenko since 1986, when the Gorbachev government invited then-Fed Governor Wayne Angell and I to Moscow to advise them on how to convert to a market economy from the socialist command economy. We advised him then that unless they fixed the ruble to gold, instead of trying the “shock therapy” of Jeffrey Sachs and The New York Times, the country would split apart in the inflation that would follow. Geraschenko supported our idea but Gorbachev went with the Keynesians and the USSR fragmented in the hyperinflation that followed. From this story we saw on the web yesterday, it seems clear that the central bank is in the process of devising a convertibility mechanism that would keep the ruble fixed to gold at a specific weight. The gold coins did not sell in 1980 because they were offered at a price several times greater than their gold weight. If they proceed successful, the ruble would become “as good as gold,” and better than the fluctuating dollar. As there are now tens of billions of dollars in circulation in Russia and environs, a gold ruble would displace them and they would have to be reeled in by the Federal Reserve. In 1986, we told Geraschenko that if Russia were to go to gold, the economy could expand by leaps and bounds, eventually forcing the United States to compete by introducing a gold dollar.

DEFLATION WATCH: Jack Kemp’s WSJ op-ed calling for a return to a gold standard seems to have withered on the vine, but that’s chiefly because it ran just as Congress was taking off for the July 4 holiday. Senate Minority Leader Trent Lott will make a floor statement when he returns next week, his office tells us, putting the op-ed in the Congressional Record. As one S&P company after another reports weaker than expected earnings, Treasury Secretary Paul O’Neill is sure to be asked about fixing the dollar to gold at $325, which would prevent further painful adjustment to the deflation. General Motors is still sticking with its plan to produce 1.2 million vehicles in the 3Q and Ford is sticking with 930,000. By Labor Day, we should see the inventories build at a rate precipitating sharp cutbacks in the 4Q and a consensus will form that the interest rate cuts and tax rebates are not producing the hoped-for “V-shaped” recovery.

CAPGAINS: Even as the deflation produces a bleaker budget picture -- with revenue projections declining at the federal, state and local levels -- there remains hope for a cut to 15% in the capital gains tax when Congress returns. Democrats seem to have finally come to terms with the growth arguments for a capgains cut, including the dynamic that it would produce more revenue at a lower rate. The fact that Tony Blair’s finance minister, Gordon Brown, now is a champion of lower tax rates on capital gains, and shorter holding periods, is part of that important revolution in thinking of the world’s left-of-center parties. Republicans and right-of-center parties could wind up being outflanked. Bush’s economic advisors guided him away from capgains with the argument that he would have trouble handling the “fairness” argument. In New Jersey, where the governor’s race will be closely watched this fall, the “Kemp Republican” nominee Bret Schundler won the nomination without a capgains plank, again fearing the “fairness” issue. He will have trouble overcoming Democrat Jim McGreevey’s early lead in the polls if he remains timid on tax reforms.

CHENEY: As Vice President Dick Cheney is by far the most important member of the Bush team, we hope his pacemaker fixes the heart problem that clouds his future. We practically have to assume, though, that if there is another episode that casts further doubt on his ability to live with the high stress of his job, he will resign -- as he has repeatedly said he would under such conditions. There is no public discussion about this possibility, but plenty of private speculation on who would replace him. President Bush of course would give Secretary of State Colin Powell a first right of refusal, but there is a good chance Powell would refuse, after consultation with his wife, Alma, who worries about assassination. Bush’s second choice would be Pennsylvania Gov. Tom Ridge, I think. Ridge was ruled out in the veep selection process last year because he is pro-choice on abortion, but that objection may not hold with Bush securely in the White House. Powell, it should be recalled, took himself out of contention for veep although he could have had it if he wished, and he is more “pro-choice” than Ridge, who supports the restrictions approved by the Pennsylvania voters in a referendum several years ago.

ISRAELI ASSASSINATIONS: Israel seems to have the only government in the world with an official policy of assassinating its opponents. On p. A5 of The New York Times today we see our ambassador to Israel, Martin S. Indyk, protesting the decision of Israel’s security cabinet to press ahead with its policy of assassinating “suspected” Palestinian militants “in an effort to stop persistent killings of Israelis.” Indyk said: “The United States government is very clearly on the record as against targeted assassinations. They are extrajudicial killings, and we do not support that.” The reporter says “The decision fell short of demands by rightist ministers for a broad military assault on the Palestinian Authority.” The right-wing ministers describe the policy as “active self-defense.” From its earliest days of nationhood, Israel has been following a policy of active self-defense, on a larger scale called “pre-emptive strikes.” Escalation of Middle East violence seems inevitable, which would mean, as always, nervousness in the markets about energy supplies. By the way, I am told by Nation of Islam chief-of-staff Leonard Muhammad that Louis Farrakhan has been having constructive meetings with politically important rabbis in New York. I’ve believed for many years that Middle East violence will end only when the religious leaders work at reconciliation. Certainly political assassinations go in the opposite direction.

THE MILOSEVIC TRIAL: Those of you who have been clients for several years know I have attributed the problems in the Balkans to the destructive policies forced on Belgrade some 15 years ago by the International Monetary Fund -- many of the same “shock therapy” policies that were supported by our defense establishment as a means of breaking up the USSR. On the Polyconomics website today we are re-running a memo I wrote two years ago to Sen. Tim Hutchinson [R-AR], going over the history of the break-up of Yugoslavia. I have never met Slobodan Milosevic and we may find that he was indeed “the butcher of Belgrade.” The fact we would pay a $1 billion bribe to the current Belgrade government so it would hand him over to the International Court at the Hague -- with not a single complaint from anyone in our government or Congress -- seems a vivid example of the intellectual corruption in our political establishment. Our Founding Fathers were surely turning in their graves on July 4 as they read all about it in their favorite newspapers.