Open Letter to George Melloan
Jude Wanniski
November 25, 1997


[In his “Global View” column, George Melloan, deputy editor of The Wall Street Journal editorial page, this morning addresses the topic of monetary deflation in Asia. It is the closest any major commentator has come to identifying the U.S. Federal Reserve as having some responsibility for the financial turmoil in Asia. Melloan, who I have known for nearly 26 years, is still some distance from seeing the Fed as the source of the problem, which is why I wrote the following before breakfast, hoping to encourage him to go the rest of the way. Unless the Journal directs criticism at Fed Chairman Alan Greenspan for permitting the dollar deflation, there is little chance anyone else will.]

George -- You and the others on the WSJournal editorial page continue to inch up on the real causes of the deflation that is threatening the world economy, it already having caused serious damage in Asia. Yet as close as you get to identifying the Fed as the source of the problem, at the last minute you back away from the thought. In your column today, “Is There a Cloud of Deflation Blowing Up From Asia?,” I was happy to see you at least suggest that the Fed may have some responsibility in addressing the problem. The thrust of your column, though, is that the Fed’s policies are good for the United States, even while they might be bad for the rest of the world. With that kind of analysis, there is no chance of getting the Fed to change policy. You would have to argue that Americans must suffer inflation in order to make life easier for a bunch of reckless Asians. I hope you agree that is what your column suggests. Until and unless you understand that Fed policy erred in allowing gold to fall to the “neighborhood of $300,” as you put it, there is no chance of a reasoned policy change. The market will have to await a serious decline of asset values here, which would be met with an emergency addition of dollar reserves to get the dollar gold price back to $350. This would end the dollar deflation that has been unwittingly instigated by Alan Greenspan’s Fed, but not without the horrendous cost of needless global bankruptcies. Every day that goes by sees tens of thousands of corporate and household bankruptcies all over the world as a result of the Fed’s deflation. These bankruptcies are occurring here as well as in Asia, although the favorable change in the tax treatment of capital gains this year continues to offset some of the negative effects of the monetary deflation. The broken eggs cannot be patched together by an emergency policy shift in January.

You continue to make the mistake of arguing that inflation and deflation are always monetary phenomena, as opposed to “real” phenomena. Although at times you have accepted my argument that the Smoot-Hawley Tariff Act -- a real tax, not a monetary impulse -- caused the collapse of asset values on Wall Street in 1929, in your column you return to the idea that the Fed made a mistake back then by not adding monetary liquidity. If the shock of the protective tariff caused the decline of asset values in 1929, how could that possibly be offset by an addition of monetary liquidity? If you can explain that to me, I will buy you lunch at the Golden Arches. If the price of gold was $20.67 the week before the Crash, $20.67 on the day of the Crash, and $20.67 the week after the Crash, how can you possibly blame the Federal Reserve for not preventing the Crash by its failure to print more money? For 20 years, I have been trying to persuade the monetarists that their argument explaining the Crash of ‘29 does not hold up. They refuse to address my logic on the grounds that I do not have the correct academic credentials. It is critical that you and your colleagues at the WSJ come to terms with the arguments David Gitlitz and I have been making all year, because nobody else in the world will begin to take them seriously, it seems, until you do. 

What are the arguments that Gitlitz and I have been making all year? It is precisely that in this case, the deflation is a dollar monetary phenomenon, while you and the editorial page have been insisting that the collapse in Asia is the result of non-monetary factors involving “bad judgment” of one sort or another by individuals in the marketplace. You almost put your finger on it when you note the decline in the price of gold. The deflationary crisis did not exist when gold was $385 a year ago. It did not exist when gold was at $350 early this year. It finally touched down in Thailand when gold moved to $325. And it began wrecking things in general in “the neighborhood of $300.” Remember, George, it was Bob Mundell who persuaded all of us many years ago that: The Fed determines the dollar price of gold, the Bundesbank determines the DM price of gold, and the Bank of Japan determines the yen price of gold. Now unless you are prepared to argue that the price of gold in dollars is determined by people in Bangkok making bad loans, which I do not believe you will, you must take the next logical step of saying the deflation in gold is the responsibility of the Fed. And what is hurting the rest of the world is surely hurting the U.S. economy and will harm it further as time unfolds -- unless the Fed acts to correct the global problem it has created. You know that Greenspan has asked that we not send him any more of our arguments. He does not want to think about the crisis he knows he has generated and thinks it will help if he does not read about it. Once the Journal makes this argument in its editorial columns, though, he will have no choice, unless of course he cancels his subscription. I can tell you there is no political leader out there, in either party, who is willing to make the argument, Jack Kemp included. As long as the Journal provides editorial cover for those, like Larry Kudlow, Larry Hunter and Wayne Angell, who also have Jack’s ear, and are still arguing that $300 gold is good for the world, he will not budge.

I think we would all agree the President has no idea what he is doing in this crisis. We watch him in Vancouver at the APEC meeting talking about how the Asians have to do the right thing with the help of the International Monetary Fund in order to creep out of the hole they are in. The hole will get much deeper if the only help Asia gets is the advice of Treasury Secretary Bob Rubin and the IMF. I hope you noticed the stock market in Seoul fell like a stone on the rumor that the IMF was coming to help. The Journal’s editorial this morning, “Korean Leadership,” was obviously written by some junior member of your staff, as it places all the blame of what is happening there on the inefficiencies of Korea’s corporate architecture. Yes, yes, it would be nice if the architecture favored the entrepreneur instead of the chaebol, but it is not very helpful for the Journal to blame the chaebol for this mess.

If I could recommend any single thing that you folks do in the days ahead it would be to explain Japan’s difficulties in terms of the dollar deflation. I’ve done everything I can to get Larry Summers at Treasury to understand Japan cannot solve its crisis with the kind of fiscal stew he and Rubin are trying to peddle in Tokyo. I was dismayed to see your editorial page today giving so much space to Marty Feldstein, the airhead who has been a contributing editor to the page since President Reagan threw him out of his administration for gross airheadedness. Marty thinks Japan can solve its problems by getting the yen to 100 to the dollar from ¥127 at present. This would drive down the yen price of gold, which should be closer to ¥44,000 or even ¥46,000, and is now ¥38,000, to ¥30,000. We might as well send the Enola Gay back with A-bombs. The answer, of course, is to have the Fed add liquidity to get the gold price in dollars up to $350, which would permit Japan to end its crisis with an exchange rate roughly where it is today. (To keep it at ¥127, it would have to add yen reserves, of course.)

Please take this open letter in the Thanksgiving spirit, George. When I read your column at 6:30 this morning, it was the first ray of hope I’ve seen in months. The mere fact that you would suggest the Fed has some responsibility here was enough to make me thankful.