Memo To: Sen. Chuck Grassley
From: Jude Wanniski
Re: Remember Our 2001 Lunch?
It was the last weekend in February 2001 and lasted almost three hours. You and I and your wife Barbara and my Patricia, at the poolside cafe of the Breakers resort in West Palm Beach. It was my Polyconomics' client conference and you were our guests for the weekend. It was only a month after the inauguration of President Bush you were still chairman of Senate Finance (as you are now), before Jim Jeffords left the GOP and the Senate went Democratic. The reason the lunch was so long, you may recall, is that I introduced you to the idea that Richard Perle and Paul Wolfowitz were hellbent on taking us to war with Iraq, that Don Rumsfeld was of the same mind, and we would have to count on Vice President Cheney to hold them back. He sure didn't.
What you may not remember as easily, Senator, was my warning that we were deeply into a monetary deflation and that it would mean record numbers of personal and corporate bankruptcies in the years ahead, as there had been in previous several years. I'm sure I told you that credit-card companies and banks were pushing for a tougher bankruptcy law without understanding this source of the problem, but that it was the worst possible time to enact the law. At least wait until the price of gold, then $265 per ounce, got back above $350 or so, I suggested, which would take a lot of the deflationary pressure off the country's debtors. Well, I don't know if that's why the bankruptcy bill didn't pass the Senate in 2001, but it was nice that when it did pass last week with your backing the price of gold was $435 oz and the deflation is behind us.
If you read the NYTimes today, you may have seen in the Week in Review section a related article, "Bankruptcy, the American Morality Tale." It reminded me about our lunch because it quotes various bankruptcy experts who say they really can't explain the explosion of personal bankruptcies in the last several years. In other words, I could tell you in advance, and the experts now look back and are still scratching their heads. A few days after our supply-side conference at West Palm, I wrote the following memo-on-the-margin for this, my public website; I'd hope you would realize that what is really screwing things up is the floating dollar:
Please Amend the Bankruptcy Bill !!!
Memo To: Republican and Democratic Senators (March 6, 2001)
From: Jude Wanniski
Re: Danger Ahead
Yes, I understand the eagerness of the nation's financial institutions to tighten up the bankruptcy law that makes it relatively easy for our citizens to get out of a financial squeeze by declaring bankruptcy. As you now will be taking up the bill, which the House has already passed, with a promise from President George W. Bush that he will sign it into law when it gets to his desk, I must warn you that it will create great damage to the social fabric unless you at least postpone its effective date. The reason President William Clinton vetoed the bill last year was that it would cause ordinary citizens who are living at the edge of financial ruin to be further pressed toward insolvency. If that were the case in 2000, it is an even more dire situation today.
The problem, Senators, is not that our people suddenly are becoming wastrels, running up consumer debt to pay for wine, women and song, but that since 1997 the Federal Reserve has been squeezing the economy at large with a horrific monetary deflation. In the classical economic model that Alexander Hamilton would recognize if he were alive today, the decline in the dollar price of gold in 1997, to the $265 level from the $385 levels of 1996, is a sure sign of monetary DEFLATION. That is, the dollars have become more and more valuable in terms of gold and other goods and services in this period, which is why people who owe money are finding it harder and harder to service their debts. If INFLATION may be termed "debtor relief," because debtors can pay off their loans with cheaper dollars, "deflation" can be terms "creditor relief," which is what the great Austrian economist Ludwig von Mises termed it. It would be no surprise to Hamilton or von Mises that 1998 was a record year for bankruptcies in the United States, with more than 1.4 million people having to resort to that embarrassment. Households and businesses that declare bankruptcy wish to avoid the alternative of crime in order to acquire the assets necessary to service that debt. Because the deflation has worsened considerably in the last several months, as the gold price has plummeted again, I assure you we face record bankruptcies with or without a tightening of the laws.
There is nothing wrong with the current bankruptcy law that could not be fixed by returning to the gold standard which President Richard Nixon left in 1971. That of course would prevent the Federal Reserve from inflating or deflating, so there would be no monetary swings to cause creditors or debtors to suffer in one direction or the other. If you cannot resist the impulse to tighten the law, you should at least amend the legislation so that it does not take effect until you can resolve this aspect of the way Congress is exercising its Constitutional responsibility to manage the nation's money. To make it more difficult for households and businesses to declare bankruptcy to get relief from the deflation only will cause the national crime rate to rise more quickly and sharply. It of course will effect society in other ways, with an increase in the number of divorces and abortions that quickly add up when households are under this kind of economic stress.
It is extraordinary that President Bush's chief economic counselor, Larry Lindsey, who knows the terrible stress the economy is under because of the deflationary errors of the Federal Reserve, would sign off on a tightening of the bankruptcy laws at this time. At the same time, he is practically begging the Congress to pass the President's tax bill as quickly as possible, so that citizens will be able to get a little money in their pockets with which to pay their record consumer debt. I'm sure the big bankers prefer that you tighten as much as possible as soon as possible, so their balance sheets will look better, but I believe it is they who have in many ways been intellectually responsible for this state of affairs. If they were behaving in the great tradition of banking in the United States, they long ago would have insisted on making the dollar as good as gold, no more, no less. If the banks are afraid of bankruptcies unless they can squeeze the masses a bit more, let them call Fed Chairman Alan Greenspan and urge him to end his mindless, senseless deflation.