Larry Summers, Mercantilist Jude Wanniski September 10, 1997

Memo To: Larry Summers, Deputy Treasury Secretary
From: Jude Wanniski
Re: Your comments on the yen

After the Financial Times quoted you yesterday as saying the Japanese should promote a domestic-led recovery instead of an export-led recovery, the yen appreciated against the dollar to 119 from 121. The exact quote was: "I continue to be concerned that Japan does what's necessary to achieve the domestic demand-led growth to which it's committed and avoid the export-led growth that has been a hallmark of many past Japanese recoveries." I'm afraid there is almost nothing at all correct or helpful in your statement. The effect of any yen appreciation at this point is to further deflate the Japanese financial system, making it that much more difficult for it to grow internally. That domestic weakness ~ to which you unwittingly contribute — is what increases its exports and decreases its imports. Note the effect of the yen's appreciation on your comment caused the gold price in Japan to fall to ¥38200 from ¥38841. In the course of the dollar's appreciation against gold, to $321 from $383, which began last November, the yen gold price has appreciated to the current level from ¥42900. That is an 11% deflation against gold, Larry. By our estimate, for the yen to be where it belongs, at an equilibrium level that favors neither yen debtors or creditors, gold would have to be ¥44000.

The model you are using to critique Japanese monetary policy is the same one Fred Bergsten used to destroy the Carter Administration. I'm not saying you are causing problems for our economy, except insofar as we are damaged when a major trading partner like Japan is damaged. Only that you cannot usefully apply a simplistic, cash-flow trade model that equates a change in the dollar/yen exchange rate with a purposely engineered "export-led recovery." Your comment that "export led growth" has been "a hallmark of many past Japanese recoveries" shows a further shortfall of understanding of Japan's economic evolution in the past 30 years. It has had no "export-led" recoveries, but rather has been an exporter of capital as its population has become wealthier during a period when the yen has appreciated from ¥360 in 1967 to ¥120 today.

If you were to think for a moment about the significance of these numbers, instead of shooting from the hip, you would know you could not have been correct in your "hallmark" comment. Yes, Mexico devalued the peso and wrecked its economy, with your help, in an explicit effort to drive down the cost of its domestic labor. Its Finance Minister, Guillermo Ortiz, said so at the time. But Mexico's workers labor at a few dollars an hour, after devaluing the peso these last 30 years by several thousand percent — always with the encouragement of your pals in the Bergsten crowd. A Japanese carpenter working in Tokyo is paid $120 per hour. For you to suggest there is anyone in the Japanese government giving the slightest thought to an export-led recovery, by driving down domestic wages, is silly, and once you think about it, you will agree. You are too smart to carry around these nonsensical ideas, which belong in 17th century mercantilist textbooks, not in your intellectual portfolio.

If you want to help our economy and Japan's as well, you would do better openly advising Alan Greenspan that the dollar price of gold at $321 is approaching dangerously deflationary levels. If he had some encouragement to add liquidity to the banking system, the gold price would rise to $350 and the dollar/yen rate would move back toward ¥115. The Bank of Japan could then add liquidity to get the rate back toward ¥120, and in the process the yen price of gold would climb back to ¥42000, thus ending the current deflationary threat in Tokyo as well. Know what I mean? I will post this memo on my website today, as well as e-mailing it to you, and I will fax it to Alan Greenspan, who knows exactly what I am talking about. All the best.