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Memo to Alan Greenspan Revisited

July 28, 1998

To:          Chairman Alan Greenspan
Date:       July 27, 1998
From:      Jude Wanniski
Ref:         THINK AGAIN

[Following is a memo I wrote to Greenspan on October 30, 1997. It reads as if it were written yesterday, as nothing has changed, except Greenspan has even more evidence of monetary deflation, yet insists he still sees only inflation on the horizon. When I wrote the following, there still were few signs of actual misery among the people of the planet caused by the deflation, but now we hear of at least 50 million people having been driven into desperate poverty, with more to come. Greenspan doesn't get all the blame for refusing the see a deflation when it hit him on the chin. As far as I can tell, none of my old gold buddies agreed with me last October, instead telling me to relax and enjoy the falling prices. They still say it isn't deflation, but as the Fed chairman, they are only in denial. P.S. The day after Greenspan received this memo, his office called asking that we take him off our mailing list.]

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The financial press is applauding your testimony before the Joint Economic Committee yesterday, but the financial markets are not. In fact, as you finished your prepared remarks and began answering questions, the DJIA, which had jumped 125 points, began to fade, finishing up only 30 at the conclusion of your appearance. As your remarks were analyzed around the world, markets soured further, and we are back in the dumps. I must say I've never been more disappointed in you, Alan. In telling the JEC that you have weighed the evidence carefully and believe we face an inflation threat, not a deflation threat, you have broken your own link to gold just as surely as Richard Nixon broke the dollar's link to gold in 1971. The thought came to me of a conversion in reverse, the equivalent of Paul walking backwards on the road to Damascus. As long as I've known in the last decade that you held the gold price in your mind as the best signal of incipient inflation, I've thought of you as the only anchor keeping the world economy from spiraling out of control. This year you have been especially good in citing the dollar price of gold as the best single piece of information on the direction of inflation.

It is true that nobody on the illustrious Joint Economic Committee of Congress has the sense to ask you how you could be worried about inflation when the gold price is down $70 on the year. What would you have said if the question had been asked? That throughout your life, you have been guided by the principle that gold conveys better than any other commodity the direction of inflation and deflation -- but you have now changed your mind. You know I believe you are the most powerful man in the world, because of the control you have over the world's money. You are the chairman of the world's central bank. If you substitute your own judgment for that of gold, ignoring its deflation signal, you should consider the suffering you will cause to that large fraction of the 6 billion people on earth who do not have a cushion to see them through to a lower world-price level. Unless you find a way to supply the dollars being demanded, in a way that moves the gold price up toward $350, the consequences are clear and inevitable. Only a few countries now remain brave enough to maintain a dollar peg -- Hong Kong being one, backed by Beijing -- but every central bank in the world remains guided by the dollar, with some, in Japan and Germany, deflating even faster than you and your colleagues at the Fed.

My only slim thread of hope is that your testimony yesterday represents a political maneuver on your part, that you are trying to lay the foundation for a shift in policy stance at the November 12 meeting of the FOMC. Even there, I think I'm kidding myself, as you have had ample opportunities over the past year to note the decline of the dollar/gold price and understand its impact on the world economy. You said yesterday that problems almost always begin in the banking systems of domestic economies -- by way of absolving yourself of the blame for what happened in SE Asia. When Thailand follows your lead by pegging its currency to ours, it expected it would gain the benefits of your genius and your principles. It inflated with you and then it deflated with you. You might think it is of no matter that they put that trust in you, but the consequences are the same. In your 11th year as Fed chairman, you may be deciding that you know better than the markets where equity prices should be, and that for the first time in several thousand years, gold is throwing off a false signal -- indicating deflation when you know inflation is just ahead. When markets fall, you can assure Congress and the financial press that the declines are "salutary." When a significant fraction of our citizens and the 6 billion on earth find the deflation putting their backs to the wall, that must be "salutary" as well. I urge you to think this through again, Alan. You have so much of your life invested in the guiding principles of free markets and the golden rule, it would be a shame to retreat when you're so close to success.

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