Letter to Malaysia's Deputy Premier,
Anwar Ibrahim
Jude Wanniski
October 14, 1997


The currency turbulence in Southeast Asia of course poses great economic difficulties for your 20 million people. The 25-30% devaluation of the ringgit, in these last two months -- following the Thai baht’s loss of almost 40% -- will cause a serious monetary inflation in your country and the entire region in the period ahead. The sharp decline of the real value of the wages of Malaysian workers will be the biggest problem for you. As in Mexico’s peso devaluation, the squeeze on workers as they find their wages buying less causes them to economize on their debts. I urge you to consider a plan of action that would mitigate these difficulties, especially if you could persuade your counterparts in Thailand and Indonesia to follow suit. First, though, it is necessary for you and Prime Minister Mahathir Mohamad to understand that the primary source of your difficulties is the volatility of the U.S. dollar’s exchange rate with gold, not the market speculation that has exploited the weaknesses in the region that were opened wide by the dollar’s deflation this year to $325 gold from $385 gold. It alarms me to read that Prime Minister Mahathir now believes a “Jewish” conspiracy is behind your troubles, and that this idea has spread to Indonesia. Of course, you can always trace currency volatility to Jewish financiers on Wall Street, as they dominate the profession because of their long history in it. As a former editor of The Wall Street Journal, as a Christian, and as an advisor to Wall Street investors today, I can assure you there are far more Jews who lost money on their Southeast Asian investments this year than those who made money betting against your currencies. 

The basic problem is that we continue to live in a world that relies upon the U.S. dollar as its main unit of account, its numeraire, while the dollar itself floats up and down against gold, which has been the world’s primary numeraire for thousands of years. Federal Reserve Chairman Alan Greenspan, I believe, would like to fix the dollar to gold again, at perhaps $350, which would prevent the kinds of dislocations you are experiencing, and as the people of Mexico have experienced since 1994 when the peso lost more than half its value relative to the dollar and to gold. Since his appointment in 1987, Greenspan had maneuvered to keep gold as close to $350 as he could. When he was forced to accommodate the Clinton tax increase of 1993, gold moved up to $385 to reflect the surplus liquidity in the banking system. Alas, the Bank of Thailand was forced to inject surplus liquidity into its own banking system in order to keep the baht’s dollar value constant. Thai bankers were then forced to make riskier loans, to unload the surplus liquidity. The other countries of Southeast Asia were put in a similar predicament, as they followed the path of the dollar and the baht. When demand for the dollar began climbing last November, following our elections and the prospect of a tax cut on capital gains, the price of gold began falling, dipping as low as $315. In order to follow the dollar’s path, the Bank of Thailand had to drain liquidity from the banking system, causing the monetary deflation that unraveled the country’s fragile network of credits and debits. 

The other Southeast Asian economies were not chosen by the speculators as the primary target because they were stronger than Thailand at the outset. Thailand’s special problem was that it took seriously the advice of Paul Krugman, a prominent American economist, who two years ago toured Southeast Asia warning your countries against “hot money” flows. You wisely ignored Krugman’s advice and continued to welcome equity capital, which is what he considers “hot.” Bangkok fell for his advice and tightened up on capital inflows, which stalled the country’s growth. It became the weak link when the dollar deflation appeared this year. When the baht’s devaluation weakened the whole region, because of the interlacing of trade among your countries, the speculative pressures shifted to Kuala Lumpur, Jakarta and Manila. 

You are all now roundly denounced by Stanley Fischer, the IMF’s chief economist, for making bad real estate loans, but as usual he does not know what he is talking about. If you permit the IMF to come into the region and dictate terms, you will only doom your economies to the austerity policies favored by Fischer. His advocacy of freely floating exchange rates is not much improvement on fixing your currency to a volatile dollar. The tax measures he will impose, as he did in Mexico, will dictate a perpetual low rate of economic growth. Where you should be growing at least at 10% a year, Fischer prefers no more than 3%. It will be years before Mexico is back where it was when Fischer and his colleagues helped persuade Mexico to devalue.

I’m writing this to you, Mr. Ibrahim, because you are the likeliest man in the region to pull things together in a positive way. A positive force must emerge, or the IMF will win without a fight. Insofar as the IMF does represent the most powerful corporate forces in the U.S. industrial and financial world, it is biased towards keeping emerging countries from becoming competitive with ours. There is no planned conspiracy, but it does happen as a matter of course that those on top find ways to rig the game so they will stay on top. 

What to do? I would not recommend a repegging of currencies, primarily because the region’s currencies have devalued to levels that should not be accepted. Because the general price level has not yet had time to inflate to the levels implied by the percentage devaluations, you should attempt to persuade the international markets that you fully intend to restore the ringgit to a stronger position, via appreciation. You and the other economic leaders of the region, especially those in Bangkok, should be alerting the markets that your goal is a stable ringgit and baht and rupiah and peso -- and you will use domestic monetary policy to pursue this goal. That is, you should quickly establish the idea that you will allow the exchange-rate signals to dictate your monetary policies -- and that the dollar/gold price will guide those decisions. The international market immediately would see the currency risks being removed from the region. There would be an immediate demand for the currencies and a sharp decline in interest rates. The message the markets are getting from Indonesia’s commitment to a “free-floating system” is doing terrible damage to Indonesia’s economy.
Any of you doing this alone would be in extreme difficulty, but to have several of you join together -- with a combined population of four hundred million or so -- would give great weight and credibility to the effort. Speculators would have a hard time finding weaknesses to exploit. Because you would be able to adjust your target to gold, if the dollar moves against it too far in one direction or the other, you would be secure against the inflation/deflation cycle that has now stormed through the region. The demand for your currencies would be so strong that you could tell the IMF to go home. With this kind of success, Singapore, Taiwan and China itself would be able to assemble an Asian-wide currency regime years in advance of Europe.