Krugman Watch: Green Cheese
Jude Wanniski
June 7, 2000


To: Paul Krugman, Ph.D., N.Y. Times columnist
From: Jude Wanniski
Re: Fixing to a Floater

First of all, professor, I want to apologize for not keeping up with your column as I promised when you began writing it early this year. I've read every single one, now and then finding things with which I agree, other times not, but since I wrote the last episode of the "Krugman Watch," May 4 where I chided you for dismissing the importance of the fixed exchange rates in Europe which together comprise the euro, I've not been sufficiently motivated to either shower you with praise (as I did March 28 when I awarded you a "C-") or with brickbats (as I did May 4). Your Sunday column, "Green Cheese Rules," was the inspiration I needed.

It is now clear that you are determined to persuade the Swedish Academy to take back Robert Mundell's Nobel Prize in economics, awarded to him on the basis of his work in the late 1950s and early 1960s on "optimal currency areas." Because of this work, Mundell now is considered the "godfather of the euro." You want all currencies to continue floating, Dr. Krugman, which means you must make the political arguments against fixed rates, i.e., that floats work better. I thought your May 3 column might have been an anomaly, but now I see you have boldly set out to make a career at the N.Y. Times out of preventing a return to a gold/based dollar. You say as much Sunday when you quote John Maynard Keynes as having written more than 60 years ago that when a recession occurs because people are hoarding money instead of spending it, the government should act as if the moon were made of green cheese and that a green-cheese factory, a central bank that printed more money, would be as good as the moon.

And how do you go about ridiculing the idea of fixing the dollar to gold? You select Argentina, which today is "facing serious economic problems -- a weak recovery from last year's nasty slump, growing labor unrest... Yet Argentina has special symbolic importance in the battle among economic ideologies. The Latin nation has been a sort of poster child for the anti-Keynesian revolution, for those who want to banish discretion and human fallibility from monetary policy."

Hello? Dear professor, you are a very intelligent man with an IQ that rivals Treasury Secretary Larry Summersí, we are told. You can make little mistakes, but this one is such a whopper it leads me to suspect you have decided all is fair in ideological warfare, and that you have decided to be a charlatan. Even the chairman of the Senate Banking Committee, Phil Gramm of Texas, who also has a Ph.D. and who favors floating currencies over a fixed-based gold system, would see you are pulling a fast one. As you do point out, since 1991, Argentina has been fixed to the U.S. dollar, which is not fixed to anything. All it did was "banish discretion and (Argentine) fallibility from monetary policy." The intelligentsia of Buenos Aires instead gave discretion over the value of its national currency, the peso, to a most fallible Alan Greenspan and his cohorts at the Federal Reserve.

What I mean to say, professor, is that you indicted gold, but you put floating paper on trial. You then promptly convicted floating paper and sentenced gold to death. Huh?

Now I will acknowledge, on your behalf, that a lot of my old supply-side friends have given up on ever persuading the U.S. government to return to a gold-based monetary system, which gives ALL the discretion to the marketplace in matching the demand for dollars with the exact supply. Argentina has been the poster child for the "currency board" idea, which works when the dollar is stable against gold, but which falls apart when the dollar is inflating or deflating against gold. My old allies will say you are being intellectually dishonest in criticizing Argentina, when it did in fact end its hyperinflation with its currency board at a time of dollar stability against gold. But they are ALMOST as intellectually dishonest as you are by pretending that a currency board stabilized the peso, when it was a stable gold/dollar price that stabilized it. A currency board is the monetary apparatus of Milton Friedman's monetarists, Steve Hanke in particular. The fact that The Wall Street Journal editorial page became a champion of currency boards when its editors threw in the towel on gold is a good reason for you dumping on currency boards, not on gold.

Argentina was doing just fine until the dollar deflation that began in November 1996, when our government became serious about cutting tax rates, pulled down the dollar price of gold and pulled down the peso with it. The fact that Argentine debt has much shorter maturities than we have in the States meant that the deflation traveled that much faster, as peso contracts unwound. And because deflation smashes commodities first, just as inflation benefits commodities first, the Argentine commodity economy got kicked hard as farm prices collapsed in train with gold. Are you following this, Dr. Krugman? In addition, where the International Monetary Fund cannot kick the United States around (because the big U.S. banks run the IMF), it had Argentina under its evil boot, forcing it to raise taxes again and again in order to qualify for aid.

You note that Brazil and Chile are doing better because they devalued their currencies against the dollar, and of course you are correct. But I hasten to add that both counties disengaged from the deflationary U.S. dollar, saving their commodity-based economies from at least the worst effects of the dollar deflation. Mexico also is better off for having its peso float when Greenspan deflated, but Mexico still is not as prosperous or productive as it was just prior to when your friends at the IMF and U.S. Treasury coaxed the new Zedillo administration into a peso devaluation -- at a time, December 1994, when the dollar was NOT deflating.

All I am really trying to do here, Dr. Krugman, is clean up the mess you made in your Sunday column and suggest you not repeat the errors, or I will be forced to take serious action! Perhaps a letter to the editor of the Times. At the very least, I will ask you to sit in the corner wearing a tall, pointy hat.