Jewish World Review Dec. 27, 2001 / 12 Teves, 5762

Jack Kemp

Jack Kemp
JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
David Limbaugh
Michelle Malkin
Chris Matthews
Michael Medved
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

Governments create calamity, markets get the blame -- WHEN democratic governments create economic calamity, free markets get the blame. In today's world that means the International Monetary Fund, with U.S. backing, bails out lenders on the condition that creditor governments agree to poison their citizens with fiscal austerity, causing the people to rebel and turn to socialism. If you want to know where the next riots will break out, follow the IMF "candy man" around the world.

It's happening in Argentina today. The economy is melting down, there have been deadly riots in the streets, President George W. Bush insists that Argentina stay with the IMF program of fiscal austerity, the government has fallen and Peronist governor Adolfo Rodriguez Saa has been sworn in as president.

Economic collapse in Argentina began with a failure of U.S. monetary policy that created worldwide dollar deflation and led to a global recession. Because Argentina's peso is linked one-to-one to the dollar through its currency board, the government was forced to sit idly by since 1997 while its currency appreciated 30 percent in tandem with the dollar against gold, other commodities and other currencies around the world.

The result was a dearth of peso liquidity that resulted in falling prices and economic contraction. Today wholesale prices are falling at an annual rate of 7 percent, and consumer prices are declining at a 1.5 percent annual rate. The money supply continues to shrink at double-digit rates.

Ironically, the IMF, usually obsessed with the shibboleth of "overvalued" currencies, failed to recognize the effects of dollar deflation and instead mistook effect for cause and blamed Argentina's economic woes on budget deficits and unmanageable debt. While it is true that the former government of Fernando de la Rua mismanaged the nation's fiscal affairs and allowed spending to get out of hand, these mistakes were by no means the prime cause of Argentina's meltdown.

Argentina's debt has become "unmanageable" because its economy hasn't grown in three years. De la Rua's biggest mistake was to succumb to the fatal attraction of bailout loans once the economic slide began and join in dangerous liaison with the IMF to increase taxes, impose salary reductions on public employees and slap on financial controls that threatened to seize up the financial system.

Think of Argentina's one-to-one exchange rate between the dollar and the peso as an aircraft carrier (the United States) and a motorboat (Argentina) afloat on the high seas. If the motorboat economy floats freely, an economic squall can swamp and sink it, but if it tethers itself to the aircraft carrier, the resulting stability allows it to weather most storms.

A currency anchor, however, won't prevent the political crew of the motorboat economy from making policy mistakes like raising tax rates and increasing regulations, which can create an economic crisis. When that happens, the IMF typically comes around with cash in hand insisting on more tax hikes to reduce deficits and demanding that the small economic craft cut itself loose from its currency anchor in the hope that a free-floating currency has a better chance of righting itself.

Bad advice. Small currencies invariably sink in high economic seas as speculators make runs on the currency, capital flees the country and wealth is destroyed.

What happens, though, if the motorboat is shipshape but the aircraft carrier for some reason, say deflationary monetary policy, begins to take on water and ride lower in the sea? An aircraft-carrier economy may not be much affected by the additional monetary ballast of a heavier currency, perhaps experiencing little more than a slight slowdown in speed. But small changes to how high the motorboat's anchor ship floats can have catastrophic consequences for the smaller vessel. If the anchor ship sinks low enough and the point at which the two vessels are tethered cannot be adjusted higher up on the hull of the anchor ship, it can drag the motorboat under water.

Argentina's economy will not recover as long as it lies prostrate between the hammer of dollar deflation and the anvil of IMF austerity. With 80 percent of Argentina's debt in dollars and workers' and businesses' income in pesos, allowing the peso to float freely would impoverish the country and increase the debt burden.

A new government cannot be established on the foundation of debt repudiation. The new government's default on Argentina's $155 billion debt must be followed up by debt rescheduling and a plan to reliquify the economy, cut tax rates and reduce regulations. One approach would be to allow the central bank to print sufficient pesos to buy up enough debt to reverse the currency's unwarranted appreciation. Alternatively, the United States could alleviate the deflationary squeeze by having the Fed purchase sufficient new peso bonds to inject adequate dollar liquidity into the economy to relieve the deflation without breaching the currency board.

Time is short. Unless America lends a hand, the socialists and the IMF will only wreak more havoc in Argentina.

Jack Kemp is co-director of Empower America and Distinguished Fellow of the Competitive Enterprise Institute. Comment by clicking here.


12/18/01: 'Tis the season for Daschle to compromise
12/12/01: Hard choices made simple
12/05/01: Straight talk on Iraq
11/28/01: Not all tax cuts are created equal
11/20/01: Words have consequences
11/15/01: Deflationary recession
11/07/01: Consider Mideast reality in the war on terrorism
10/30/01: No 'stimulus' required
10/23/01: Good out of evil
10/16/01: Watching Iraq
10/12/01: The putrid stench of evil
10/04/01: Trade, terror and truth
10/01/01: Drive this scourge from the face of the Earth
09/25/01: Bush emerges as leader for his time
09/06/01: Middle East Madness has a chief instigator
08/30/01: It's about economic growth, stupid!
08/22/01: Phlebotomizers at the IMF
08/17/01: The Greenspan Recession
08/08/01: From Kyoto to Bonn, no science equals nonsense
07/25/01: Fiddling while the world economy freezes
07/19/01: Schundler should be New Jersey's next governor
07/12/01: Second wind for the global economy
07/06/01: An interest-rate target with no bull's-eye
06/28/01: Tax harmonization --- American-style
06/21/01: Warming diplomacy --- at what price?
06/13/01: A party that stands for nothing deserves to lose
06/07/01: No peace in the Middle East
05/30/01: Jeffords' palace coup
05/24/01: A supply-side energy plan
05/16/01: Getting Lincoln right
05/10/01: A good reason to borrow
05/01/01: Supreme Court makes racial profiling the law of the land
04/26/01: Campaign finance reform: silencing the lambs
04/17/01: Right wanted might in China case
04/12/01: How minority entrepreneurs can save the tax cut
04/04/01: Whose privacy is it?
03/29/01: A letter from Seoul
03/20/01: Ignore the double talk and double the tax cuts
03/13/01: Don't give up the bully pulpit on Social Security, Mr. President
03/06/01: Another attack on the economy
02/28/01: It's time to end deflation
02/21/01: Building blocks of humanity
02/15/01: Trumping the propaganda
02/06/01: The Gipper at 90
01/30/01: Kicking off a season of economic growth
01/24/01: The Bush tax agenda
01/17/01: Debating the Clinton legacy
01/10/01: No need for another Social Security commission
01/03/01: Truly a Golden Age, if we can keep it
12/27/00: The Grinch who turned off the holiday lights
12/20/00: Forging ahead
12/13/00: A new tax system for the 21st Century
12/07/00: Global government in retreat
11/30/00: An open letter to Fed Chairman Alan Greenspan
11/21/00: Don't forget the guy in charge
11/15/00: Civic virtue, civic vice
11/08/00: Memo to the president-elect
10/31/00: Scare tactics won't work
10/24/00: Prosperity in the balance
10/11/00: Al Gore's economics of fear
10/03/00: Al Gore IS debatable
09/27/00: Government should protect our online privacy
09/13/00: The most important issue
09/05/00: Defeating the Gore blitz
08/29/00: Workers of the world, rejoice
08/22/00: Just the facts, Mr. President
08/08/00: Reclaiming Lincoln's legacy
06/23/00: A renaissance for urban America?
06/16/00: Capital access can bridge 'digital divide'
06/08/00: Some friendly advice for Rick Lazio
05/26/00: Is the economy being saved or destroyed?
05/22/00: Immigration and the promise that is America
05/12/00: Stock market roulette or snobbery?
05/04/00: Is Rule of Law whatever we say it is?
05/01/00: Myths happen

© 2000, Copley News Service