Giving Advice to Moscow Jude Wanniski March 24, 1999

Memo To: Jack Kemp
From: Jude Wanniski
Re: Trip to Moscow

I certainly hope you can work out a trip to Moscow, now that the official invitation from the Russian government has come through. As far as I can tell, nobody in the world is giving decent advice to the beleaguered government. Maybe you can help in a way that would make a difference. Our friends at the WSJournal are no help, as usual. They devoted the lead editorial yesterday to a lot of snide commentary about the anticipated visit of Prime Minister Yevgeny Primakov, recommending he be sent home without an aid package from the International Monetary Fund. The Journal says the only aid we should give Moscow would be in the form of cash for intercontinental ballistic missiles, "at a suitable price."

If you think back, when I pleaded with the Journal to help the old Soviet Union convert to market socialism in 1989, it instead backed the "shock therapy" advice of the Harvard crowd, led by Jeffrey Sachs and Larry Summers. Other conservative intellectuals also knew full well that an unprepared precipitous leap into a market economy would impoverish the USSR, with the rampant inflation causing it to fragment. Looking back, I can at least see some excuse for feeding Mikhail Gorbachev the wrong advice, knowing it would poison the last vestiges of the USSR command economy. Technically, the Cold War with the USSR was still on. It was enough for me, though, that Gorbachev wanted our help in converting to market socialism. As far as I was concerned, the Communists knew they had been whipped fair and square, by the power of our form of democratic capitalism. Perhaps I was wrong in thinking it quickly would lead to the kind of political restructuring that would serve our interests and theirs -- but I don't think so. When I was invited to Moscow with Federal Reserve Governor Wayne Angell to advise them on how to fix the ruble, we both insisted that before they lifted price controls, they had to link the ruble to gold -- at a rate that would not cause inflation. At the time, the ruble was seven to the dollar on the black market, and I urged a specific rate of four to the dollar. Angell said he would be happy enough with seven, but that in any case, in order to build a market economy, the government had to start with a gold numeraire -- a fixed unit of account around which prices could be worked out by the market.

There has been no excuse for the terrible advice the U.S. has given Moscow since the Cold War ended. Conservative Republicans rooted for Boris Yeltsin and they got him, but still the only advice we offer is for them to sell us their missile systems. The problem they have is the same as always. The ruble is now 23,000 to the dollar, relative to 1989's four to the dollar. In trying to fix the ruble to the dollar instead of gold, Yeltsin put his fragile economy at the mercy of the U.S. Federal Reserve Board. In the last two years of monetary deflation, caused by Alan Greenspan's refusal to worry about the $100 decline in the gold price, the world dollar price of crude oil plunged from $25 to $11, and the chief source of Russia's hard currency earnings plunged with it. Did the WSJournal say anything about the blame that belongs on our shoulders for the global collapse of commodity prices? In its editorial yesterday, saying Primakov should get out of town (before he canceled his trip anyway), there was no mention of the terrible problems our central bank has caused billions of people around the world, who are helpless to defend against a predatory, bullying America. (I urge you to read Garry Wills's excellent essay on this subject in the March/April Foreign Affairs, which I discussed in Monday's "Memo on the Margin.")

Think back, Jack, to how peaceful and prosperous Yugoslavia seemed a dozen years ago, before the International Monetary Fund went to Belgrade and offered the government advice on how it should free commodity prices so the market could take over. The gullible Yugoslav government did so, sending the dinar into an inflationary free-fall. When it lost 99.99% of its value, and the federation split into pieces, I ran around trying to get my old supply-side friends to see what a terrible thing our Political Establishment had done. The economy purposely had been pushed into a deep depression, and all the ethnic and religious rivalries that had been dormant under the socialist flag of Marshal Tito's Yugoslavia were alive and festering. Whoops! Not a finger was lifted anywhere, not at the Journal, not anywhere.

Now we have my old colleague George Melloan, who writes the Journal's "Global View" column, yesterday DEMANDING that we bomb Yugoslavia to show those murdering thugs who is the BOSS! Melloan dismisses the arguments of Senator Don Nickles [R-OK], who says bombing won't work, by insisting that after we have killed enough of Serbia's young men, their parents will rise up an pull down Slobodan Milosevic! Wasn't that what was supposed to have happened in Iraq, when the Journal backed the idea of starving the 20 million Iraqis to death, on the assumption they would rise up and topple Saddam Hussein?

God only knows when all this stupid bombing will end? I'm afraid, Jack, there really is little chance of getting help from our old Cold War comrades if we are to fix up the planet Earth. All they seem interested in involves building Star Wars, B-1 bombers, cruise missiles and economic embargoes. So I do hope you go to Moscow and warn the Russians to beware of any advice tendered by Washington, the IMF or our major newspapers. Primakov has to go for the gold, and go for it quickly, or what remains of Russia's pitiful economy will be plowed under during Y2K. When the central government loses control completely, those nuclear warheads the WSJournal fears will be dispersed far and wide, and who knows where they will wind up?