Memo To: Francisco Gil Diaz, Finance Minister
From: Jude Wanniski
Re: Tell Them About Greenspan
You may have heard of, or perhaps read, the front page story in the Sunday NYTimes, “Farm Unrest in Mexico Challenges New President,” by Ginger Thompson. It is pretty grim, a detailed story of how Mexico’s huge peasant population can no longer make ends meet because of the collapse of commodity prices. It now costs more to grow and harvest many farm products than can be realized when they are sold, so why bother? This is what oil-producing countries discovered in 1998-99, when the dollar price of oil sank to $10 a barrel. Because it costs more than $15 a barrel to develop the infrastructure for new production, investment in the world petroleum industry hit a brick wall, and when economic recovery began last year, there were no reserves and the oil price went through the roof. Of course, Mexico’s farmers have to pay the world oil price, so they are doubly hit by the pricing problems producers face everywhere.
There are people who will read the NYT account and say there are too many Mexican farmers anyway, and the price of progress may have to be paid by their distress. I’m not one of these people, Paco, as I can see where the problems for your farmers originated, and there is nothing positive about it. You should tell your new president, Vicente Fox, that Alan Greenspan is to blame. That’s right, the Maestro, our Federal Reserve Chairman, who has presided over the last four and a half years of dollar deflation, caused by his refusal to recognize the declining gold price in dollars as a sign that he was being too stingy in dollar creation. I warned him and the Clinton administration in early 1997 that the Fed errors would lead to declines in the price of oil and other commodities – and eventually all goods and services priced in dollars. When that happened, Mexico’s farmers looked up at the border with the United States and saw a tidal wave of farm imports coming toward them. America’s corporate agribusinesses had no choice but to dump their surpluses anywhere they could, and Mexico was right at hand. Of course, the neighborliness works in both directions, as Mexico dumps its surplus workers across the Rio Grande as illegal immigrants.
If there had been no North American Free Trade Agreement (NAFTA), the farmers would not have been so easily swamped by a glut from the north. The tariff would have held back some of the flow. In this way, NAFTA wound up benefitting those industries that are now guaranteed a market in the U.S., at least as long as our economy holds up enough to have buyers. When President Fox meets with President George W. Bush, he hopes to “solve” the problem by having the U.S. hand out free passes, perhaps even citizenship, to the 3 million illegal immigrants here. I’m not suggesting Mr. Fox do otherwise, as the problems he has at home with urban/rural income disparities would be more difficult to solve without a “safety valve.” It is sad, though, that it has become part of Mexico’s general economic policy to export surplus citizens and to believe there is no better way to run a government. Your former president, Ernesto Zedillo, seemed to think it was only natural that we would provide Mexico’s politicians this “safety valve.”
My recommendation, Paco, is that you give President Fox a thorough briefing on the Greenspan problem. You can also tell him that Greenspan would perfectly understand what I am saying, as I warned him in 1997 of the distress he would create in continuing to ignore the gold signal. You may not remember, but after our multinational banks coaxed the Zedillo government into devaluing the peso in 1994, thus impoverishing tens of millions of your citizens, Greenspan was asked by the Senate Banking Committee if it could have been avoided. Yes, he said, if we had been on a gold standard. The dollar would have been stable against gold, the Fed would not have been manipulating interest rates to manage the economy, and the Wall Street speculators would not have been able to attack the peso. As I recall, Rep. John La Falce [D NY] was the one member of Congress who questioned the NAFTA treaty because it lacked a monetary accord. He wasn’t thinking gold, but we have to, Paco, or the poor people of North America will be forced to trek around following the movements of capital flows. How inefficient. How much better it would be if Mexico’s farmers could stay where they are and see capital flow to them. No?