Latin America
Jude Wanniski
April 5, 2005


From: Jude Wanniski
To: Bernanke
Subject: More Latin America
4:40 pm, 4/5/2005


This is from Poly's West Coast representative, who is puzzled at how you got picked for CEA chair when the White House needs support for its supply-side reforms. I told him you were auditioning for Fed chairman. But you should note Jett's puzzlement is general in our crowd.

Steve Metcalf, who is doing the NYT magazine piece on gold, spent 3 hours with me today, w/tape recorder. I encouraged him to contact you for your views on money/gold etc. I sent him several pieces in advance and he had devoured them all. A pleasant young man. One of the main points I made about demand-siders -- both Keynesians and Monetarists -- is that they minimize the importance of tax rates, as opposed to tax revenues. In my book, TWTWW, in the chapter on the breakdown of the economic models, I point out that in Keynes general theory there is scarcely a mention of tax rates or revenues, and in Friedman's Monetary History of the U.S., there is only a footnote or two devoted to fiscal policy in thousands of pages about money. This ain't economic science. I'll give you your e-mail address, which is on the Fed's website anyway, and let you decide if you want to take this step.


PS Greenspan's oil speech today failed to mention that his monetary deflation of 1996-2001 crippled the world energy industry. It's something I'm sure he does not like to think about, unless he is under sodium pentathol.

From: "Wayne Jett" <* * * * *>
To: "Jude Wanniski" <>
Subject: Re: Latin America
Date: Tue, 5 Apr 2005 08:45:31 -0700

Thanks for sending this. Excellent and direct. It's hard for me to view BB's LA speech as inadvertently mistaken, when he has given a series of speeches (the "gold standard" voodoo, for example) that paints the Fed's practices as unerringly brilliant and sterling leadership for the world. I'm still completely puzzled by the WH choosing him as chairman of the CEA; he isn't
anywhere close to SS, so who is going to keep him on track when he is the one who is suppose to keep the WH on track when dealing with tax reform, SocSec reform, etc.? W

From: Jude Wanniski  <        
To:      Ben.S.Bernanke@ * * * * *.GOV                                               
Subject: Latin America
Bcc: SDMETCALF@* * * *.com, Poly

10:02 am, 4/5/2005

Dear Ben:

I happened to be in the Fed website looking for a Greenspan speech and spotted your February speech on inflation in Latin America. I'm afraid it is a seriously flawed piece, primarily because it fails to take into account the impact of dollar inflation following August 15, 1971 on Latin currencies, which in turn impacted their progressive tax systems producing stagflation at best and hyperinflation at worst. I began writing about this phenomenon at the WSJournal in the 1970s, most notably with a lead editorial of September 1976, "The Nickel Peso," following Mexico's devaluation of the peso from eight cents to five cents -- on the advice of economists from American banks. (Citicorp had 300 economists, wall to wall Friedmanites, and they dispensed their nonsense throughout the Citicorp universe.)

My editorial warned that the devaluation would produce a serious inflation in Mexico and, because of the progressivity of the tax system, there would be a stagflation that would wreck the government's finances AND LEAD FOR FURTHER CALLS FOR PESO DEVALUATION. This was not only the monetarists, but the Tobin/Cooper/Bergsten Keynesians, who wouild arge that the first devaluations were obviously not sufficient to bring about "export led recoveries." Of course I was correct, and Mexico then spent more than a decade devaluing to the point where the peso was worth a fraction of a penny. An added pressure was the IMF, with Keynesian practitioners urging successive governments in Mexico city to devalue and to raise tax rates to increase revenues and balance budgets. The U.S. was spared the evils of the IMF Keynesians, who often followed the advice of Rudy Dornbusch, quoted in your February speech. Mexico's plight ended in 1989 when Salinas came to power and brought Pedro Aspe into the government as finance minister. Aspe told me he and Salinas, both Harvard PhDs, declided to throw their textbooks away and fight further devaluations and cut tax rates, defying the IMF and also defying Nick Brady at Treasury. If you ever run into Aspe, ask him about all this, because he will tell you that I helped save Mexico from the Brady poison. Nick was demanding that Mexico devalue in order to get favorable treatment on "Brady Bonds." I flew to DC to meet with Brady after being informed by Fed Vice Chairman Manley Johnson what was going on. I spent an hour and a half explaining to Brady and his deputies that if he forced Mexico to devalue, another serious inflation would follow, and there would be riots in Mexico and a million refugees crossing the Rio Grande within the following six months. I also met with Dan Quayle and warned JBIII what was up. Brady relented, Mexico did not devalue, and inflation ended as the peso maintained its crawling peg with the dollar.

The Mexico Bolsa for the next three years was the leading stock market in the world -- in dollar terms.  All that ended a month after Salinas left and the new government came in, with a President who had a PhD from Jim Tobin and Yale, and who promptly devalued the peso (urged to do so by the Deputy Treasury Secretary, Larry Summers. If you connect the dots, you will realize that Summers to this day takes credit for bailing out Mexico, when in fact all he did was help clean up the mess he had made. Who benefitted from the peso devaluation? The New York banks, who used their inside information from pals inside the IMF to learn that a peso devaluation was in the works. They shorted the peso and made more than $2 billion in a matter of weeks. The losers were 90 million Mexicans, screwed because of the floating dollar. Greenspan testified before Senate Banking in early 1995 and was asked by Sen Bennett of Utah if there was anything that could have been done to avoid a peso devaluation. Greenspan said it would not have happened if we were on a gold standard. If you think I'm kidding, ask Greenie, or check the hearings.  (I was in the hearing room, sitting by chance next to Ross Perot.)

Mexico is not the only example, Ben. I could go through one country after another to show how the dollar inflation wrecked Latin and South America with the help of the IMF's poison. The five countries of Central America were all fans of the USA prior to 1971, every government conservative and market oriented. They all had different income-tax system, though, with Costa Rica the shallowest and El Salvador the steepest. When all five, tied to the dollar, imported the dollar inflation that followed, all five experienced economies weakened by the impact of inflation on tax progressivity, but Costa Rica fared the best and Salvador the worse. This gave rise to emigration from Salvador to Costa Rica and clashes between the two peoples (remember the soccer wars). Costa Ricans were outraged that they were losing their jobs to cheap wages of Salvadoran emigres.

All through these experiences, American economists of the left and the right remained stupefyingly ignorant of what was actually happening. They continued to award each other Nobel Prizes in economics.  It is about time that there were some adjustments made in our history of what happened back then and what's going on now. Especially for the news chairman of the CEA.

Best wishes, as usual,


PS  You might pass this on to  Carlos Arteta, Jane Haltmaier, and Patrice Robitaille.... who assisted you in your February piece.