March Briefs Jude Wanniski March 2, 2004

GOLD SLIPS FURTHER: Our renewed deflation concerns are being borne out by gold’s continued decline, now approaching $390, as continued economic expansion pushes up liquidity demand. If rear-view inflation stats come in on top of continued signs of economic strength, the market will have no choice but to deflate further on concerns the Fed will make liquidity supply even tighter. Fed Chairman Greenspan can allay those concerns a bit without mentioning gold, but he had better start thinking about how to move his lips in that direction or all nominal prices including equities will be under pressure. The DJIA decline today may well be linked to the $7 plunge in gold.

CHINA CURRENCY: In his recent testimony, Greenspan indicated it would be a good time for China to appreciate the renminbi. We thought so when gold was headed north of $430 in January and believed it would happen when reliable accounts appeared in the state-owned Chinese press that it was in the works. The Bank of China reports go back and forth on the issue, maybe yes, maybe no, probably reflecting the confusion relating to the gold price decline in the dollar, and of course the pegged renminbi. If it de-links, it would have to re-link to a credible basket of currencies including the dollar, euro and yen, maybe even throwing gold into the basket, as there are surely advisors watching gold’s decline. My advice to Beijing now would be to wait a bit to see what Greenspan and the Fed do if gold continues to inch down. They can make their move when it becomes clearer whether they have to or not, and what shape the move might take.

GREENSPAN TODAY: At the New York Economic Club today, Greenspan spoke at length about forex issues with Asia and he was never worse. Nobody can predict forex, he argued, because the market is so superior to individual models. What is this about? He continues to wash his hands of the 1997-2001 monetary deflation and what it wrought. Certainly, the market is great at fixing the dollar/yen rate, etc., but it is the Fed and the Bank of Japan that determine the dollar/gold rate and the yen/gold rate with their daily errors in matching liquidity supply to demand, using their own flawed models. It is not very encouraging going forward with a new deflation. Sorry.

CALIFORNIA: We expect that all the polls are accurate in predicting that California voters will approve propositions #57 and #58, giving Schwarzenegger the $15 billion he needs to stave off drastic measures to pay the state’s bills. While this is good news for the state’s growth prospects, it will cause dollar liquidity demand to be higher rather than lower, which will feed into the deflation problem. Sorry about that.

FSC: The World Trade Organization (WTO) has begun the process of laying penalties on domestic industries for the U.S. government’s subsidization of exports via the Foreign Sales Corporation (FSC). The net result still is not clear because there are so many different ways this can go between Senate Finance and the House Ways and Means committees. But almost without doubt, the final legislation will be better for capital formation and give an upward push to the real economy. Sorry to add, though, that this will also add to liquidity demand, which would mean in the absence of gold triggering an equal supply, there will be a downward push to nominal equity prices.

HAITI: There has been an unusual amount of skullduggery in bringing about the coup against President Aristide, with the Bush Administration pulling strings from day one to undercut Aristide. On the other hand, Aristide has been a miserable flop, unable to figure out why Haiti has had the miseries and going along with IMF/World Bank poisonous programs that have been demolishing the island economy. After years of tax hikes and inflation, thresholds at which personal and corporate income tax rates are encountered are at the very top of the Laffer Curve. The lowest bracket for each, 10%, is reached at $444 per year. Worse, the pitiful revenue stream these produce go to pay the interest on Haiti’s $1 billion in dollar debt. Will these issues be addressed in the “nation building process” ahead? If so, then it is wonderful, but why does it take a coup?

DEMOCRATS: To tell you the truth, I have been tuning out completely on the Democratic presidential nomination during the past several weeks, just checking out marginal changes in their positions on economic policies. There is just too much time between today and Election Day in November to say anything meaningful on where the candidates will be on the various economic issues that will affect policy and the financial markets.

IRAQ: It is still hard to see how this issue can possibly work for President Bush’s re-election in November. If there were any progress on the Arab/Israeli front, he might be able to pull a rabbit out of the hat, but it seems to be going in the other direction. Now that we are in the orbit of the presidential elections, both political parties want the support of the Jewish political establishment, not necessarily for financial support, but for the clout it wields in the political/media arena. When the Israeli defense forces last week sent in gunships and troops to break into a neighborhood Palestinian bank and walk off with $7 million in cash, on the grounds that they knew the money was going to be used to finance terrorist acts. The State Department issued a small press release saying it was not nice to do that. However, no politician in either party said a word, and there was no other press account or follow-up. Pre-emptive bank robbery is okay. The problem for Bush is that this all spills over into Iraq, where the Muslims have their easiest opportunities to make life miserable for our troops, for supporters of the U.S., and for President Bush.

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