Cyclical Bear Market? Jude Wanniski July 28, 1998

Barton Biggs of Morgan Stanley Dean Witter is absolutely, positively sure we are entering a serious, cyclical bear market. He’s been sure about this for the last three years but now is really sure. Japan looks rotten. Asia looks rotten. Commodity prices are down. Stocks are overvalued and will fall 20% to 30% over the next few quarters, he thinks. Woe is us. It’s easy to sympathize with Barton when the Dow Jones Industrial Average is getting beaten up, and it could well be he is right this time. Perhaps Wall Street will spend the next six to nine months in the doldrums. If so, it will be entirely because of Alan Greenspan’s monetary deflation, which grinds away at the foundations of the economy. The deflation isn’t big enough to wreck the domestic economy, but it has already brought recession to those sectors that rely on the production of commodities. Farmers, ranchers, miners and independent oilmen are being squashed and the small banks that serve them are being hammered too, forced to sell out to the Big Guys. 

When gold was at $312 last October 29, we wrote “Alan Greenspan, Deflationist.” Even after gold’s $70 decline in the previous year, he still argued the problem facing the Fed was inflation: “Greenspan does not see recession yet, but that’s only because he does not see the economic declines getting started around the world. Now we have to wait for the weakness to show up in government statistics here before Greenspan will consider an end to his deflation.” Gold now is down to $290, yet the Fed chairman continues to insist inflation is just over the horizon, and still the political establishment and the news media continue to act as if there were no connection between the Fed and the global economic contraction. Biggs himself doesn’t make the connection. To be sure, it’s hard to find a supply-sider outside of Polyconomics who makes the connection. The Wall Street Journal editorial page should have Greenspan boiling in oil, but protects him instead by furthering the argument that the International Monetary Fund is to blame. Jack Kemp will criticize Greenspan in theory, but won’t in practice. 

At lunch yesterday at The New York Times, I tried to explain all this by saying poor people make a living by using their brawn, not their brains. As they use more of their brain and less of their body, their real wages rise. The richest people make a living by using only their brains. This is why nobody is complaining about Greenspan’s deflation, because it is “only hurting poorer people,” those who are drawers of water and hewers of wood, who make their living on commodities. The fact that as a national economy we are 90% brainpower and 10% brawnpower encourages us to enjoy a deflation that the rest of the world must finance with its brawn. The Washington Post last week reported that 200 million Indonesians are now eating one meal a day, which leads Greenspan to encourage Congress to give $18 billion to the IMF, so Indonesia can pay its foreign debt. Did the NYT editors know what I was talking about? Well, it’s hard to take gold seriously.

So what then about Biggs’s cyclical bear market? Maybe it will take a few quarters of downtime on Wall Street before enough people complain about the domestic costs of deflation to turn Greenspan around. He clearly wants to see the unemployment lines lengthen before he adds dollar liquidity to a world dying of thirst.