What? What? C. Fred Bergsten? Again? Jude Wanniski March 17, 1999

Memo To: Foreign Affairs editors
From: Jude Wanniski
Re: "The Coming Dollar-Euro Clash."

As promised on March 15, I will read the articles in your March/April issue at random and make my pronouncements on their worthiness. On the 15th, I flunked Harvard Professor Martin Feldstein's advice to the emerging markets. Today I will flunk C. Fred Bergsten, the chief economist of the Institute for International Economics. While Marty is just a hapless bumbler, trying to make his way in the world as a conservative Keynesian, Fred has and remains a true force of darkness in his career as an agent of the Big Banks and the Eastern Establishment. I've been keeping an eye on Fred since I first encountered him in the Foreign Affairs issue of January 1972, in which he predicted the collapse of the U.S. economy unless we devalued the dollar against the Japanese yen, forthwith. When history looks back upon the rubble of the Carter administration, they will find Fred's work in the Treasury Department on behalf of a cheap dollar as the primary source of the inflation and financial turmoil that ended the Carter reign. Thank goodness President Clinton came to office in 1993 with a pledge to support Alan Greenspan and ignore Fred Bergsten. He at least learned something from the Bergsten shocks of the 1970s, even though you have not.

Unfortunately for the world, Fred's pals continue to occupy the International Monetary Fund's Evil Empire. Hey editors, check it out. If you want to know why the world economy remains in such a mess after several decades of advice from the Council on Foreign Relations, the Blackstone Group, and the Institute for International Economics, you need only trace Fred's poisonous advice going back at least to 1972. I once thought of hiring a college kid for a summer's work to track every time Fred wrote an article, made a speech or testified for the devaluation of the dollar as a cure for all that ails us. My guess is that the number easily tops 2,000.

How does he get away with being so wrong so often? It is because the vested interests he represents make bundles of money on currency plays. How nice it is for a currency speculator to know that a country will devalue its currency in advance. You can short the currency at a stupendous leverage and turn a million into a hundred million! This is the banking Mafia that will strangle an emerging country with IMF strictures, if only to make a quick buck. Bergsten, a hired pistolero, gets what he wants from the Capitol Hill political establishment. Let me tell you, boys, the Banking Mafia is feared. The last time I saw Bergsten, it was in early 1995 when we both were called to testify before the House Banking Committee on the Mexican peso crisis. Chairman Jim Leach looked down from on high as I read my statement, with Fred sitting next to me at the witness table. Bergsten took out his lunch and sat there munching away at the witness table, knowing Leach dare not complain. It may be the only time in the history of Congress that a witness ate a sandwich and potato chips and guzzled a Coke while under the gaze of a committee chairman. Why? Bergsten can call down all that is evil on those who cross him. Billions of dollars in black profits made by inside trading are involved in the universe of floating exchange rates.

The article in your bimonthly is itself Bergsten Boilerplate. Dollars will get you donuts that he not only did not write it, but barely scanned it. The thesis is that the euro will CHALLENGE the dollar, so we better watch out, and do what Fred says we should do, i.e., DEVALUE the dollar. (This brings Fred up to 2001 calls for a cheapened currency.) It is not clear from his ramblings whether the euro will DEFEAT us in this challenge by being STRONGER than the dollar, especially as he recommends that we purposely WEAKEN the dollar. The thought suddenly occurs to me that maybe there may be no editors at Foreign Affairs, only Peter G. Peterson of the Blackstone Group, chairman of the Institute that pays Fred's salary, looking over the manuscripts.

Let us put aside the fact that the United States is the only superpower left in the world, at the top of the global power pyramid, with a military budget several times larger than Europe's. Let us put aside the fact that the dollar has been the world currency and unit of account since World War I, when England bled itself into poverty via war, ridiculous income-tax rates, and a floating pound. Let us put aside the fact that ever since the euro was introduced on January 1, as a coming attraction, it has slunk from $1.16 to $1.10. There is no earthly reason to believe that the euro will emerge from its cradle as a full-grown gladiator, ready to slay the dollar as the world's primary unit of account. Bergsten never has been very smart, but this is dopey. He might as well predict that the golf courses of the world will shift to meters from yards. The euro is so fragile, it might not even survive Y2K, although I hope it does. The increased efficiency that a reliable euro would bring to the world economy would be a good thing.

No, editors, if you wish to restore your lost glory, you cannot continue to run such junk in your magazine, especially in the lead position. If you owe Fred something on some past football bet, put him back next to the brassiere ads. I mean it, he is a menace. Look at this one graph I have selected for your perusal:

America obviously needs a currency correction to help reduce its trade deficit. In light of the lag between exchange-rate shifts and trade flows, the administration must hope that it will come sooner rather than later so that results, especially for industrial workers, show before the 2000 election. But a sharp general fall in the dollar could trigger latent inflationary pressures as long as the U.S. labor market remains tight. In turn, the dollar's decline could push up interest rates on inflation fears and foreign demand for higher returns in a falling currency. The stock market could drop and the impending slowdown could even tilt into recession. In short, the result could be an abrupt termination of America's "economic miracle."

Huh? We must devalue the dollar... even though it could lead to a stock market drop and an abrupt termination of the economic expansion? Editors? Hello? Are you there?