A Nice Little Crisis
Jude Wanniski
March 14, 2001


The NYT has a front-page piece on how the Bush administration is struggling to come up with a solution to the meltdown in the Japanese economy. This may be the crisis we have been waiting for, the parallel to the Mexico crisis of 1982 that "solved" our deflation problem at the time. I have the e-mail addresses of several key members of the Bush administration and this morning sent them a memo on how we can solve both Japan's deflation problem, and ours, by a joint devaluation against gold. That would solve the problem the NYT mentions when it notes the idea circulating that Japan should devalue the yen: That would temporarily upset the terms of tradebetween the Japanese auto industry and ours and would be opposed by our manufacturing interests.

The correct solution, I advised, is to have Japan devalue against gold, to boost the yen/gold price to roughly Y42,000. This is the price we believe would rebalance the interests of yen debtors and creditors in Japan, following a long accumulation of small monetary errors by the BoJ. At thesame time, the U.S. should devalue the dollar against gold to $350, which is the average price over the last decade. This would rebalance the interests of our debtors and creditors after a long accumulation of deflationary errors by the Federal Reserve. The net effect of this joint devaluation would be a dollar/yen exchange rate of about 119, which is where it is now. The fixing of the two biggest single economies in the world with a stroke of a pen would send world stock markets and bond markets up like rockets -- which is what happened when we adjusted in 1982. Remember in the week the Mexico decision became clear in 1982, the dollar/gold price jumped $56. The numbers do not have to be precise, of course. When the Japanese prime minister arrives on Monday to meet with President Bush, they can jigger the numbers around, if they like the idea.

Remember, when Roosevelt devalued the dollar in 1933-34, to $35 from $20.67, a much bigger percentage than would be required here, he picked the number $35 by himself, at breakfast with his Treasury Secretary Henry Morganthau. That devaluation had no significant effect on the economy because we were not then suffering a monetary deflation, but a fiscal contraction caused by the Hoover tariff and tax increases. A joint devaluation by the US and Japan right now would solve the problem by getting both economies back on their debtor/creditor trendlines. Our banks should fully support the move or steadily watch their own loans go bad as real property values deflate, as they have in Japan.

In the near future, I will send out another in my long series, "Thinking About Deflation, #16," which is really a primer that explains what has been going on, and how the economic weakness we are experiencing cannot be solved by a tax cut or interest-rate cuts -- neither of which address the debtor/creditor maladies. There would be a worldwide boom in stocks and bonds with this solution. South Africa, which is on the brink of total collapse, would of course come back to life. It could be that Ghana, the only stock market in the world that is up today, already senses a solution in the air. Before its independence, Ghana was the Gold Coast.