Notes on the Revolution VII/Yen/Gold Jude Wanniski & David Gitlitz March 30, 1995

NOTES ON THE REVOLUTION VIII

THE CONTRACT TAX CUTS: Newt Gingrich either has the votes for his “Crown Jewels,” the GOP tax cuts, or he doesn’t. If he doesn’t, he will open the bill to allow an amendment that will pick up the votes he needs to get the jewels over to the Senate. What happens now will not be definitive, as long as something gets to the Senate, which will clean things up. If anything, it would be better for Newt to be forced to amend the bill, which would then bring in a substantial number of Democrats. He would be able to say he did his best on the original before giving away to an amended version. The final version will be written in a House-Senate conference and I haven’t the slightest doubt it will be superior to what comes out of the House. The more Democrats who support it in the House, the easier it will be to get a good bill -- with a capital gains tax cut, the real crown jewel -- to the President for his signature. 

STEVE FORBES DRAFT: Nothing definite, but the movement to persuade Malcolm S. Forbes, Jr., to seek the GOP presidential nomination has gathered momentum since our Monday report. Forbes told the Newark Star-Ledger’s David Wald on Tuesday: “I am flattered and honored, but I have no plans to run. What I think it reflects is a very real vacuum for a real pro-growth agenda. Instead of talking about reducing tax rates to get the economy jump-started, people are talking about milk for school kids.” According to Wald: “Forbes said arguing over budget cuts was the wrong argument for Republicans to make. ‘You reduce the deficit through making systemic changes in the tax code, by reforming the monetary system,’ he said. ‘It’s straightforward. It’s not voodoo stuff.’” I’ve spoken to Steve since the piece appeared and found him astonished at the calls of encouragement it elicited. He says he has now had a serious discussion about the idea with Jack Kemp and that they have agreed to another discussion in the next few days. A year ago, Jack and Ted Forstmann helped persuade Steve to become chairman of Empower America. One of my most senior Wall Street clients, Arthur Gray, has joined the effort. He tells me that he and Malcolm Forbes, Sr. were among the original group that persuaded Dwight Eisenhower to seek the GOP nomination in 1952. The Forbes idea, he tells me, “is a 10-strike.” 

MEXICO: The Bank of Mexico has succeeded in stabilizing the peso at 6.7. However, the 50% increase in the Value Added Tax that goes into effect on Saturday not only drops another austerity bomb on the beleaguered citizenry, it also further reduces the demand for peso liquidity, adding to the problems of Miguel Mancera. There was, at least, some fancy legislative footwork to protect the banking system from collapse, with a complex indexing scheme designed along Chilean lines that eases cash flow problems of Mexican enterprise. The legislature has also taken most of the workforce off the income-tax rolls, which relieves some of the VAT pressure. The government will get almost no revenue from its business sector this year as the peso devaluation has wiped all the profits off the books. There is no longer any discussion of peso revaluation, either in Mexico City or in Washington. I thought the GOP leadership in the Senate had withdrawn completely from the Mexican financial crisis, but Senate Banking chairman Al D’Amato has been on the Senate floor today in full throat. He is threatening legislation that requires congressional approval of further use of the Exchange Stabilization Fund by Treasury. We don’t know where this might lead, but it could finally force a change of strategy in the direction of peso revaluation. We were told D’Amato had decided against this idea, apparently on the advice of colleagues who worried the Administration might use the threat to blame the GOP for any political crisis in Mexico. But Treasury Secretary Bob Rubin last Saturday cheerfully told the Evans & Novak show that the Republican leadership on Capitol Hill was fully on board and would share responsibility for whatever unfolds in Mexico. This may have sent D’Amato into orbit. We will see where his tirade takes us.

Jude Wanniski

YEN/GOLD

A glint of hope can be seen in Japan’s otherwise dour economic scene today as the Bank of Japan injected 1.6 trillion yen of liquidity into the banking system and the yen price of gold staged a minor recovery to the 34,500 yen level of two weeks ago. There’s no question the yen is still grossly deflated from the 38,000 per ounce level of early January (not to mention the 60,000 yen level of just five years ago, when the dollar price of gold was $375 an ounce). But today’s recovery of roughly 1,000 yen, coinciding with the yen dropping to 89.5/dollar, at least brought the metal off a nearly 20-year low of less than 34,000 yen per ounce. Particularly noteworthy was the fact that the BoJ cash injection was timed to maintain the bank’s overnight rate at less than 2.20%. Instead of keeping rates down, however, an initial injection of 1.3 trillion yen caused the liquidity-starved Tokyo money market to bid up the overnight rate to 2.28%. Another 300 billion yen was fed into the system later, but the rate still closed higher than its pre-injection level, and the yen still dropped against the dollar. In a deflation, rates at first are pushed abnormally low because the demand for credit disappears from all but the most heavily collateralized borrowers. So if the BoJ reliquifies the banking system, Japanese rates could well move higher as debtors are able to make a return on their borrowed funds.

David Gitlitz

WALL STREET WEEK: Morris Mark, a friend and subscriber for more than a decade, will be Louis Rukeyser’s special guest tomorrow night on Wall Street Week. Many of you who attend our annual conferences know Morris, one of the most successful young investors we know, a devoted supply-sider of course. We hope Rukeyser gets him into politics.

JOIN THE DRAFT: If you, like Arthur Gray, would like to tell your grandchildren you participated in the drafting of an American President, fax a note of encouragement to Steve Forbes at (202) 833-0388, or send it to us and we’ll forward it along. One of our subscribers, Steve Shipman, faxed Steve a petition from his office. You don’t have to vote for him, of course, but it would be helpful to the whole process to have a Growth Horse in the race.