by Rod D. Martin
January 16, 1998
As Asia’s economic flu continues to wreak havoc in world markets, Japan — and with it the world — teeters on the brink. Alan Greenspan holds the keys to recovery. It remains to be seen whether he can — or will — turn those keys before the Clinton Administration welds shut the locks.
For a group who’s favorite slogan is “It’s the economy, stupid,” the Clintonoids persistently show an abysmal ignorance of economics. This was painfully clear a few years ago in Mexico, when the U.S. Treasury forced a radical devaluation, turning a minor crisis into a steep depression and virtually wiping out a newly thriving middle class. Al Gore, in his Vice Presidential debate with Jack Kemp, actually had the nerve to brag that our government had made money on the deal. No doubt, thousands of unemployed, foreclosed-upon Mexicans were pleased to hear that news.
Needless to say, the administration has learned nothing. As in Mexico, the Treasury Department and the International Monetary Fund have pushed massive currency devaluations as the solution to Asia’s crisis. This is purest folly. In the words of John Maynard Keynes, “There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Devaluation is not just some ivory tower concept to be debated at the IMF: it is a deeply personal thing, destructive of whole societies, one family at a time. How would Americans feel if their life savings suddenly shriveled into nothingness, their pay was cut in half overnight, their mortgage payment simultaneously doubled, and their employer went belly-up because of skyrocketing interest rates and steeply curtailed demand? The millions of families facing this shattering earthquake will lose everything, their hopes and dreams included. Their political systems will likely go down with them, to be replaced by God only knows what. How the heartless, brainless ecocrats in Washington think this will bring stability is beyond imagining.
Before the Asian miracle collapses, with untold ramifications for America, Greenspan must act. He doesn’t have much time. He does, however, have an excellent precedent. What is needed is not devaluation, but rather a combination of Reaganesque tax cuts and deregulation with a Paul Volcker-style about-face on monetary policy. In August of 1982, in the midst of Volcker’s Fed-induced credit crunch (which annihilated the endemic inflation of the Carter years), Mexico and other Latin American countries threatened default. Volcker abruptly eased, with the result that U.S. stocks soared 30%, and U.S. interest rates plunged 37%, within weeks. This, combined with Reagan’s policies, gave us the relentless economic expansion we’ve enjoyed ever since.
Greenspan should first duplicate Volcker’s miracle at home. The virtual collapse in gold prices is alarming evidence of looming dollar deflation. Few at the Fed understand this (no shock there: Milton Friedman won his Nobel Prize by showing how the Fed almost single-handedly created the Great Depression by massively deflating the economy while it thought it was fighting inflation), but Greenspan is beginning to see the threat. Deflation in America right now would be the death-knell for Asia, the collapse of which would take us down as well.
But Greenspan also needs to repudiate the idiots at Treasury and IMF, and advise the Asians directly. Rather than devalue, they must repeg their battered currencies to the dollar at significantly higher rates than those at which they are currently trading. They must bail out individual depositors, much as we did in our own savings and loan crisis, and set their banking systems back aright. And without question, they must cut taxes. Stimulating economic growth — not through government spending but by genuine economic activity — will ultimately put all the Asian Tigers back on the road to health.
Will this be Alan Greenspan’s finest hour? We shall see.