[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.''
____________________