To all (especially you - Mike!) A letter in today's WSJ:
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Letters to the Editor
The Real Cause of Asia's Crisis
Charles Wolf Jr., in his Feb. 4 editorial-page
commentary "Too Much Government Control,"
asserts that the "primary cause of the Asian crisis" is the "legacy" of the
"Japanese development model," which gave "widespread insulation from
market forces" to the Asian economies. On the same page, Joseph Stiglitz
("Bad Private-Sector Decisions") counters with the claim that "the
problems" of Asia "are rooted in private-sector financial decisions." Both
opinions are wrong.
Absent the massive flood of money and credit emanating from central
banks around the world that poured into Asia, the Asian markets would
not have crashed. The essential cause of every financial crash is prior
monetary inflation and credit expansion.
Contra Mr. Wolf, the crony capitalism of the Asian countries has, at most,
only aggravated the debacle. Having government officials select investment
projects, distort production in favor of certain industries and then hide their
failures from outsiders causes inefficiency, lower standards of living and
eventually limited bankruptcies, but not massive currency devaluations,
stock market crashes, hyperinflations, collapsed banking systems and
social disintegration. Only sustained monetary inflation and credit
expansion can account for such calamities. If government regulation
hampered the Asian economies into collapse in 1997, how could the same
systems have given such stellar performances for at least a decade prior to
1997? Monetary inflation and credit expansion are sufficient causes of
both the boom and the crash.
It is sophism for Mr. Stiglitz to blame private lenders for the "buildup of
short-term, unhedged debt" in Asia. When central banks inflate the money
stock through the credit markets, they distort the very prices upon which
sound loans are made. Interest rates are driven artificially below the levels
determined by the supply of credit from savers. Capital values rise, making
more capital projects profitable. Entrepreneurs debt-finance projects they
would have avoided without central-bank distortions. At first, the credit
expansion may fuel less-risky, longer-term projects, but inevitably loans
are made for riskier, shorter-term projects. These loans are made at the
time because central-bank distortions make them appear profitable to both
the lenders and borrowers.
Mr. Stiglitz tries to fend off this analysis by citing "low inflation rates" as
evidence that the Asian countries have had "relatively stable"
macroeconomic policy. But monetary inflation via credit expansion will not
increase prices throughout the economy all at once. Only prices for goods
and factors purchased with borrowed money rise initially. By increasing
profits, this distortion of prices leads to unsustainable buildups of capacity
to produce the higher-priced goods. Automobiles and construction are
classic examples. Prices will rise generally only when the newly credited
money is spent and re-spent across the economy or when expectations of
pending price inflation are formed. If the absence of prior monetary
inflation accounts for the recent "low inflation rates" in Asia, what accounts
for the current hyperinflation? Prior monetary inflation, if in excess of
increasing supplies of goods, causes price inflation and, if in excess of the
inflation of other currencies, causes devaluation.
One need only recall the boom-bust cycle of the American economy in the
1920s and 1930s to dispel any illusions of Messrs. Wolf and Stiglitz.
There was a relatively open, free market in the 1920s and Fed monetary
inflation and credit expansion did not result in price inflation. Nonetheless,
the systematic distortions of interest rates, capital values and production of
the 1920s boom made the financial crash inevitable. The interventionist
policies of the Hoover and Roosevelt administrations severely aggravated
and greatly extended the suffering of the 1930s. But raising taxes and
tariffs, hampering the market with regulation and imposing social programs
neither caused nor mitigated the Great Depression.
Jeffrey M. Herbener
Professor of Economics
Grove City College
Grove City, Pa. |
