[Congressional Record Volume 140, Number 57 (Wednesday, May 11, 1994)]
[House]
[Page H]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: May 11, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                       THE FED GOES GHOST-BUSTING

  The SPEAKER pro tempore. Under the Speaker's announced policy of 
February 11, 1994, and because there is no designee of the minority 
leader, the gentleman from New York [Mr. Hinchey] is recognized for 15 
minutes as the designee of the majority leader.
  Mr. HINCHEY. Mr. Speaker, about 2 weeks ago, on April 26, myself and 
45 Members of Congress signed a letter addressed to the Honorable Alan 
Greenspan, Chairman, of the Board of Governors of the Federal Reserve 
System. The letter said, in part, as follows:

       Dear Mr. Chairman: On three separate occasions over the 
     past three months the Federal Open Market Committee has acted 
     to increase interest rates. We are writing to express our 
     concern over the Fed's actions and to request that the Board 
     take no further action to increase interest rates until you, 
     as Chairman of the Board, have explained to Congress and to 
     the American people the basis for the Board's decision.
       During your appearances before Congress you have made 
     several points with which we agree. Among these is the long-
     term economic growth depends on low and stable long-term 
     interest rates. Another point with which we concur is that 
     inflation and inflationary expectations are a primary threat 
     to low and stable long-term rates.
       You have testified that you believe low long-term rates 
     could be protected and inflationary pressures controlled with 
     a slight increase in short-term rates. The clear implication 
     of your testimony was that short-term rates could be 
     increased just enough to preempt inflation without increasing 
     long-term rates and imperiling the economic recovery.
       Just as clearly, this has not occurred. The Fed's actions 
     have driven up long-term rates, destabilized financial 
     markets, and put the economic recovery at risk. Moreover, 
     these actions have been undertaken at a time when there are 
     no significant signs of impending inflation that you have 
     made your decision to raise interest rates.

  Last Friday, on May 6 on the op-ed page of the New York Times, an 
article appeared written by Lester C. Thurow, one of the Nation's 
eminent economists. He entitled his article, ``The Fed Goes Ghost 
Busting,'' and begins by saying,

       The Federal Reserve Board has been spooked by the ghost of 
     inflation. In its panic, the Fed has raised interest rates 
     three times, taking everyone by surprise. Long-term 
     bondholders have lost billions and international currency 
     markets have been rattled. Yet the Fed's economists admit 
     they can't point to even a hint of inflation in the current 
     numbers. They are missing the obvious: The 90's are likely to 
     be an inflation-free decade, and their interest rate hikes 
     will squash the current economic recovery.
       The 70's and 80's were inflationary times. The failure to 
     raise taxes to pay for the Vietnam War led to slowly 
     accelerating inflation that exploded with the oil and food 
     shocks of the 70's. Inflation stubbornly receded in the 80's. 
     If the effects of surging health care costs are subtracted 
     from inflation figures, it is clear that more prices have 
     fallen than risen this spring.
       Sophisticated investors, including George Soros, Citicorp 
     and Bankers Trust, took huge losses because of the Fed's 
     action. They were betting on low interest rates because they 
     had no worries about inflation. The Fed's economists contend 
     that it takes 12 to 18 months for higher interest rates to 
     stop inflation, so they are acting now to prevent renewed 
     inflation in 1995. In the Fed's view, the economy is so prone 
     to inflation that even this slow recovery from the 1991-1992 
     recession--3 percent growth in 1993 and 2.6 percent in the 
     first quarter of this year--represents an overheated economy.
       The 90's began with a deflationary crash in asset values: 
     property prices in the United States declined by up to 50 
     percent. This trend spread to England, flattened Japan and is 
     now rocking Germany. While the U.S. stock market has risen 
     (the money flowing into pension and mutual funds has had 
     nowhere else to go), the inflation-adjusted fall in the 
     Japanese stock market in the 90's has been bigger than the 
     decline in the American stock market from 1929 through 1932. 
     Worldwide, hundreds of billions of dollars in wealth have 
     been wiped out.
       One traditional cause of inflation is a shortage of labor, 
     which drives up wages. Yet global unemployment rates are 
     reaching levels not seen since the Depression. Spain reports 
     24 percent and Ireland and Finland not much less. In the 
     U.S., if one adds together the officially unemployed, 
     discouraged workers who have stopped actively searching for 
     work and those with part-time jobs who want full-time work, 
     15 percent of the labor force (19 million) is looking for 
     work.
       The Fed is worried that an increasing number of U.S. 
     companies are running close to their production limits--that 
     they will be unable to keep up with the demand for goods, 
     thus driving up prices. But in today's global economy, 
     what counts is world capacity, not U.S. capacity. No 
     American will have to wait for a new car: since auto 
     makers in Japan and Europe aren't producing at anywhere 
     near capacity, U.S. producers aren't going to raise prices 
     and sit by and watch their market share erode. While 
     America's economic recovery is under way, the rest of the 
     industrial world shows no sign of coming back; until it 
     does, inflation will not quicken.
       The demise of the Soviet Union and the effective collapse 
     of the organization of Petroleum Exporting Countries in the 
     aftermath of the Persian Gulf War means there will be no 
     repetition of the energy or food shocks of the 70's. What has 
     been happening in aluminum will be repeated in most raw 
     materials: 1.3 million metric tons were exported from the 
     former Soviet Union in 1993, causing the lowest real 
     (adjusted for inflation) prices in history.
       Oil prices are lower in real terms than before the first 
     OPEC oil shock in the early 70's, yet exports from the former 
     Soviet Union have barely begun and Iraq has yet to be brought 
     back into world oil markets. When Ukraine comes back into 
     production (it was the world's largest exporter of grain in 
     the 19th century), food prices will plunge.
       The decline in real wages that began in the U.S. and is 
     spreading across the industrial world further undermines the 
     Fed's contentions. Among American men, salaries are falling 
     at every education level--for those in the bottom 60 percent 
     income bracket, real wages are 20 percent below 1973 levels. 
     Women with a high school education or less have seen their 
     wages drop, and it looks like the same will happen to college 
     educated women soon. At the same time, productivity is 
     increasing at the highest rates seen since the 60's. Wages 
     down, productivity up--that simply isn't the recipe for 
     inflation.
       Economists differ on the causes of falling wages. 
     Immigration and technical innovation are partly responsible, 
     but some worldwide trends are also behind it. The Communist 
     bloc did not run very good economies but it ran excellent 
     education systems. One-third of humanity, much of it skilled, 
     is joining the capitalist world. If some of the world's best 
     physicists can be hired in Russia for $100 per month, why 
     should anyone pay an American physicist $50,000 a year?
       In the 80's, only 60 million people in Singapore, South 
     Korea, Hong Kong and Taiwan were export-oriented. With the 
     decline of state socialism in East Asia, hundreds of millions 
     of third-worlders (two billion Indians and Chinese) are going 
     to be joining them. Inflation is going to be impossible in 
     any country with open borders: Lower-priced goods will flood 
     in from low-wage countries.
       In addition, the layoffs at big U.S. companies with high 
     wages and good benefits are unrelenting. More than 109,000 
     jobs were cut in January, a record. Getting rehired after 
     being laid off usually means a cut in pay, and the 
     competition for these lower-paying jobs drives overall 
     wages--thus inflation--further down.
       Since World War II, American companies have typically held 
     prices constant, or even raised them while distributing the 
     fruits of productivity in the form of higher wages or 
     profits. But under the pressure of international competition, 
     that system is rapidly eroding. In the 90's productivity 
     gains will lead to lower prices, not wage increases.
       Large manufacturers are forging new arrangements with their 
     suppliers. For example, Chrysler used to have hundreds of 
     suppliers, but it has given a few of them exclusive rights to 
     supply all of its parts, and Chrysler engineers will give 
     them design information. In exchange, the suppliers will 
     lower their prices every year. In such scenarios, the 
     manufacturers will in turn pass their savings on to customers 
     in the form of lower prices.
       At least one member of the Federal Reserve Board has 
     extolled the virtues of zero or negative inflation. This 
     ignores a tenet of capitalism: it doesn't work very well when 
     prices are falling. When prices fall (and many prices must 
     fall to have zero inflation, since some prices will always be 
     rising), the smartest move is to postpone purchases. With 
     prices lower tomorrow, only a fool buys today. So investment 
     falls as people forgo entrepreneurship to become inactive 
     renters. Money in the mattress becomes the only smart 
     investment. Deflationary times are tough times.
       Yet the Fed is intent on killing a very weak recovery that 
     has yet to include most Americans. The 7 percent growth rate 
     in the fourth quarter of 1993 was heavily concentrated in 
     housing, automobiles and business equipment. High interest 
     rates will hurt these sectors, and the Fed's large rate 
     increases have hit the economy at a time when growth has 
     already slowed dramatically.
       Since January, interest rates on 30-year Treasury bonds 
     have risen 1.3 percent and those on 30-year fixed rate 
     mortgages have risen 1.5 percent. These rates did not soar 
     because of worries about inflation. Rather, they reflect the 
     payoff that investors must demand to protect themselves from 
     a Fed that thinks inflation is about to rise from the grave. 
     The Fed's erratic behavior has also led to a currency crisis 
     that made necessary Wednesday's billion-dollar effort to 
     protect the dollar. While nobody has ever been hurt by 
     ghosts, investors are showing that they have real reason to 
     fear a ghost-busting Fed.''

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