A Clean Sweep by El Niño
Jude Wanniski
October 2, 1997


Memo To: Paul Kangas, PBS’ "Nightly Business Report"
From: Jude Wanniski
Re: El Niño & the Bull Market

When the United States devalued the dollar against gold in 1973, the mainstream Keynesian economists who had urged the devaluation predicted a trivial impact on the inflation rate. They reasoned that only 5% of the U.S. Gross National Product involved foreign trade, so a 10% devaluation would only amount to a 0.5% inflation rate increase. As an editorial writer at The Wall Street Journal at the time, I asked Arthur Laffer, then at the University of Chicago, what he thought, and he said a 10% devaluation would translate into a 10% inflation over time, with probably 5% of it coming in the first year. When the inflation rate came in at 5% above conventional projections, the errant economists concluded that an unanticipated event had shocked the world economy: El Niño, the weather pattern that shifts the Pacific currents every decade or so, had disrupted the anchovy breeding grounds off the coast of Chile. The protein that was lost to the world caused a great increase in the price of other grains, and this shock caused other prices to rise as well! El Niño was the “exogenous shock” that caused the inflation, the collapse of the financial markets, and the recession that followed.

Now Paul, it should be clear in retrospect that this feeble excuse was the only fig leaf available to our Nobel Prize-winning economists of the Keynesian flavor. Yet in tuning in your "Nightly Business Report" at 6:30 p.m. Tuesday night, I found that one of your regular guest commentators, Adam Smith, was propounding the possibility that the bull market under way on Wall Street may be ended by this year’s rendition of El Niño. Normally, I tune out when I see Adam Smith on your program, as he only spouts “conventional wisdom,” but the wave of disgust caused by the El Niño he spouted moved me to write you this missive of complaint. Not only about Adam Smith, but of your whole lineup of commentators, including Lester Thurow, Charlie Shultz, and the other washed-up Keynesians of yore. It is an insult to the intelligence of your vast audience to prop them up in front of the cameras night after night, saying silly things about the economy and the stock market. In your business segments, you invite back the forecasters who had cleverly picked winners in the stock market, and it is of course interesting to hear people whose track record is on the winning side. Why do you drag back, time after time, these fossils who never saw the bull market coming and now try their best to explain why it should not have happened? Get some new blood on the show, for goodness sakes.

Lester Thurow, for example, should be pitched out headfirst, sent to Elmira or Poughkeepsie in the Catskill League. He does not belong in the majors. A few weeks ago, you had him on warning investors to be wary of putting money into any country that has a trade deficit with the rest of the world, because they are candidates for devaluation. What a noodlehead. Half the world has a trade deficit and half the world has a trade surplus. They add up to zero. Just as there is zero correlation over any span of time between El Niño and the financial markets, there is zero correlation between trade deficits and devaluations. The United States has had a trade deficit with the rest of the world for the last 30 years. It has devalued against gold in that period, it has appreciated against gold in that period, and it has been stable against gold in that period. The fact that Lester Thurow is a tenured economics professor at MIT and is supposed to know about the subject, doesn’t mean that what he says is correct. If you must have someone from MIT, invite Paul Krugman on your show. If you read his article in the current issue of Foreign Affairs, you will find him making exactly the opposite arguments made by Professor Thurow, except they are backed up by observations, not just hot air. I don’t agree with Krugman on much, but he at least is original. Really, Paul, it is time to retire some of these characters. In this year of El Niño, sweep them all away at once.