Notes on the Revolution XXIII/Fedwatch Jude Wanniski & David Gitlitz November 2, 1995

NOTES ON THE REVOLUTION XXIII

POWELL: The furious attack on Colin Powell from the activist Republican right is based on an across-the-board misreading of his views on domestic and foreign policies. This combines with a profound fear that if he decides this month to run for President, he will win, and take the country on a path of social liberalism and international retreat. They see in him policy inclinations that are the equivalent of George McGovern circa 1976. By that I mean they see a redistributionist on economic policies, a softy on social policy, and a fear of intervention abroad based on the Vietnam experience. There is nothing I can say to any of my conservative friends to persuade them otherwise, to have them see in Powell’s politics an amalgam of Ronald Reagan, Jack Kemp and Martin Luther King. From their perspective, Powell is simply too soft all the way around, too much a “mommy” for their warrior tastes. Where I ascribe Powell’s hesitancy in committing U.S. legions to brushfires around the globe to his wisdom in sorting out national priorities, the GOP hawks see a four-star general who is squeamish at the sight of blood. As it happens, I think Powell would be better as Secretary of State than as President, and I think Powell thinks so too. It would have to be in an administration that would permit him to operate on a long leash, which is why I think he would be happiest working for a President Forbes. If he saw a real chance that Forbes could continue to advance his candidacy toward the Oval Office, he would join that team, I think. Otherwise, he would enter the race himself, expecting to overwhelm Dole. 

FORBES: Steve appears to have dropped out of sight among the Beltway political experts, but his campaign is in ascendance where he is campaigning. Local polls now have him second to Dole in New Hampshire, with 10%, in Iowa with 14%, and in Arizona, an early primary state, with 16%. He’s at 5% nationally, even without being heard. Governor Merrill of New Hampshire last week warned the Washington press corps that it is making a mistake in ignoring Forbes, whose candidacy, he said, is “taking off.” In the current Beltway Standard, Bill Kristol handicaps the presidential field without even mentioning Forbes. Outside the Beltway, Steve’s political inexperience is being offset by the fact that of all the candidates in the field, he would make the best President, a discovery that ordinary people are making when they see him up close. He is in the field non-stop, seven days a week, making speeches, attending picnics, doing radio call-ins, giving interviews to little newspapers in the target states. Inasmuch as he is running his own campaign -- with zero chance he will change his mind on basic views -- it is unlikely he will suddenly become less popular. Even a Powell entry is likely to cut entirely against Bob Dole. Jack Kemp promised Steve last spring that he would support him if he ran. He has remained on the sidelines so far, with his Dole-inspired Tax Commission. When the commission reports later this year, Kemp will almost certainly join the Forbes campaign, especially now that Steve has demonstrated he has sufficient punch to go all the way. (A December 13 dinner event at the Waldorf is in the works; call us for info.)

Jude Wanniski

DEBT LIMIT EXTENSION: At the moment, we have every reason to expect that a temporary extension of the debt ceiling will be enacted within the next week to allow the $31.5 billion quarterly refunding to proceed and $25 billion in interest to be paid at mid-month. This, despite the outbreak of ludicrous rhetoric from people who should know better -- including today’s Wall Street Journal editorial -- suggesting that default would be welcomed by the markets as signaling that Congress and the White House are finally getting serious about budget balancing. As this snake oil was being peddled on Capitol Hill yesterday by such Wall Street notables as Ed Hyman and Stanley Druckenmiller, even Newt Gingrich seemed to be briefly affected by its mystifying allure, telling the cameras at mid-day that he is not inclined toward any debt-limit extension until agreement on the budget is reached with the White House. It should be clear enough by now that this is all posturing by Republican leaders attempting to gain some partisan edge out of simple necessity. As devastating as even a brief default would be for the financial markets, the political implications for Republicans might be even worse: the party returned to control of Congress after 40 years in the wilderness making one of its signature statements by reneging on the government’s contractual commitment to pay its debts. Indeed by late yesterday, after meeting in the Oval Office with President Clinton, Gingrich seemed to have undergone a sudden change of heart. Standing outside the White House in the rain, Gingrich spoke in rational tones about working out an extension that will take the debt limit through early December while the Administration and Congress haggle over budget reconciliation, removing any hint of a threat to the end-of-month social security checks.

FEDWATCH: The economic and financial cross-currents currently facing Fed policymakers are liable to make the FOMC’s Nov. 15 meeting a particularly lively one. For those who hold that the primary role of monetary policy is to attempt to steer a steady course for the real economy -- which now includes most of the panel -- recent reports offer a rationale to support virtually any option. While 3rd quarter growth came in far above expectations at an initial estimate of 4.2%, and housing remains strong, manufacturing and retail are showing few signs of strength. Yesterday’s “Beige Book” prepared for the mid-month meeting observed a slowing in the pace of activity, but asserted the economy remains on a “moderate” growth path. The signals that we most closely watch in price-sensitive auction markets indicate that any immediate threat to the dollar’s purchasing power is safely at rest. Gold has traded under $385 per ounce for the past six weeks, the foreign exchange value of the dollar has fully recovered and stabilized against the Japanese yen, and the bond market continues to rally. In all of this, it is difficult to fathom maintaining a real federal funds rate some 50-75 basis points above historical averages. The 10-year note now at under 6% could soon threaten the 5.75% funds rate. Yet, we take it as a near given that the Fed will end up doing nothing at its next meeting, waiting instead to bless an eventual White House-Congress budget deal with a 50-basis-point cut in December. A seven-year budget balancing agreement, of course, has virtually nothing to do with anything the Fed should be concerned with. But the Fed exists within the political complex of the federal government, and so it must on occasion play the game by Beltway rules.

David Gitlitz