Memo To: John McLaughlin, “McLaughlin Group”
From: Jude Wanniski
Re: Surplus in 2002, Dow at 9000
[On his Sunday show, August 3, John McLaughlin predicted the Dow Jones Industrial Average would hit 9000 by December 1, but disagreed with the prediction of Fred Barnes of The Weekly Standard that the federal budget would be in surplus in the year 2002.]
The chances of the budget being in surplus in 2002 are high, and I would bet with Fred Barnes that it will be. You may have noticed on "Inside Edition" that Dick Armey says he expects the budget will be in balance or surplus for the rest of his life. Only a war could interrupt the process. Think of the era we are entering as similar to the several decades following the Napoleonic wars, when every year the problem of the Chancellor of the Exchequer was trying to figure out how to dispose of the surplus in revenues -- and deciding to cut yet another tax rate. I remember telling incredulous audiences and clients a decade ago that we would be debating surpluses by the end of the century.
Ten years ago, I’d also predicted the Dow would hit 10000 by the year 2000, although I see Barron’s is giving sole credit to Ed Yardeni for predicting it in 1995. In 1983, I was already saying the Cold War was soon going to be formally over, which would permit the post-Napoleonic experience.
Your prediction of a Dow of 9000 by December 1 in a way conflicts with your prediction of a budget deficit in the year 2002. The rise in the value of capital assets with gold not rising as well tells us that federal revenues will be going straight up -- and so will state and local revenues.
On January 2, I predicted the Dow would hit 7800 this year if the capgains tax were cut. The problem now is the Fed’s continuing concern about the economy growing too fast. Note what happened on Friday last week when good news hit Wall Street. The Dow would like to get to 9000 this year, but it will mean a continued rise in expectations of growth in productivity and quality of earnings. If Greenspan can talk the Fed governors out of raising interest rates between now and December, you could be right. The economy continues to drag this boulder called the Phillips Curve -- the idea that inflation is caused by too many people working.