Memo To: Website browsers, fans, clients
From: Jude Wanniski
Re: Prescriptions for Asia
Our website on January 6 was a review of the dozen or so prescriptions for the Asian flu offered on the editorial page of the WSJournal. As you may recall, I didn't give a top grade to any of those who responded to the call. I did write the following letter to the newspaper, offering my own remedies. The Journal did not run the letter, but as you may note, in the letter I said that David Malpass of Bear Stearns came closest to the correct answer, but that he had not clearly stated the mechanisms on how to appreciate the Asian currencies. The Journal and Malpass rectified this after I called this to their attention. In Wednesday's edition, Malpass was given the lead op-ed space to explain the mechanisms in detail, "The Road Back From Devaluation." It is an excellent piece, which I commend to you, if you are interested in this topic at this level of detail.
The several distinguished economists and businessmen who addressed the Asian financial turbulence in a January 5 op-ed failed to recommend the only correct solution: A concerted effort by the countries involved to drive up the value of their currencies by 1) increasing the demand for them and 2) reducing the supply of them. The International Monetary Fund, on whom the Clinton administration is relying to handle the crisis, is prescribing policies that 1) decrease the demand for the Asian currencies and 2) increase their supply. It is no wonder that for the last four years, since the IMF prescribed this "medicine" for Mexico, that Jack Kemp has been calling for the replacement of IMF director Michel Camdessus with almost anyone who understands the laws of supply and demand.
As Fed Chairman Alan Greenspan will agree, any increase in tax rates will reduce the demand for liquidity in a country, by which we mean currency and bank reserves. Yet the IMF prescribes tax increases. An increase in interest rates by a central bank also discourages commerce and liquidity demands, yet the IMF demands just that for the Asian countries that are spiraling into recession. Devaluation of a currency requires an increase in the nominal money stock of a country, i.e., an increase in liquidity. Yet that is what the IMF prescribes. This is voodoo economics.
The several countries directly involved in the spiral can easily solve their joint problem by lowering tax rates where they are obviously too high, as with the 50% capital gains tax in Korea, and any personal or business income-tax rates above 35%. At the same time, they must direct their central banks to sell local debt from their portfolios to their commercial banks, which reduces the supply of liquidity.
By how much? In order to avoid adjustment strains to trade flows, each country should locate its currency price in terms of gold as of, say, October 1, which can be done in one minute. A joint announcement of the several central banks that this would be the objective would cause the markets to do most of the work for the governments, as speculators would realize they could make more money in the repair of the crisis than they did by selling short on IMF prescriptions.
David Malpass, chief international economist of Bear Stearns, came closest in your survey to identifying the policy fix. Edward Yardeni of Deutsche Morgan Grenfell was best in identifying the problems we will face here unless Asia is fixed. Those who benefit most from a reversal of IMF policies are America's working men and women, who otherwise will have to compete against a massive going-out-of-business sale in Asia.