Don’t pretend you know when you don’t,” Milton Abrams said to Alice Thornton, director of the Fed’s Division of International Finance. She’d flown up from Washington to meet him in the local office he maintained at the New York branch. “China is gorging on dollars and euros and we don’t have a clue about how many.”
“These are just estim-”
“Based on what? The lies they tell us?”
Abrams pushed himself to his feet, yanked off his suit jacket, and then paced behind his oak desk. When he looked back, Thornton was staring down toward her lap, but he didn’t think her eyes had yet focused on the report lying open there. He noticed a strand of her brown hair hanging beside her cheek. It had pulled free from the silver butterfly barrette he’d bought her in Marseilles after the meeting as a thank-you for helping him control his fury. The chairman of the Federal Reserve wasn’t allowed to appear as a lunatic in public and she’d prevented that from happening.
He walked over and placed a hand on her shoulder. “I’m sorry. I know you’re as worried about this as I am.”
Thornton looked up. “And as isolated from the rest of the Barons.”
The Barons were the senior civil service staff of the Federal Reserve and the gatekeepers of the information that the board and governors received. Despite the fourteen-year terms of the political appointees, the Barons treated them as visitors passing through their feudal kingdom.
Abrams didn’t trust them any more than they respected him, an outsider imposed on them by a president during the lame-duck years of his second term, who only then felt safe in acting on his principles. And one of those was his resolve that plain speaking should replace jargon at the Federal Reserve, and the plainest-speaking economist he knew was Milton Abrams.
The title of the speech that had won the president over was: “Full Employment Is No More Full Than Welch’s Grape Juice Is 100 % Juice.”
It had been an attack on economists’ use of the phrase “full employment” to mean a level of employment that wouldn’t trigger inflation-which meant that they considered seven percent unemployment to be full employment.
That was followed by an article titled “A Moral Hazard Is Not a Sand Trap” in which he attacked the view that immorality in the world of finance was always likened to a hook or a slice, simply a mistake or an accident that had led corporate officers astray, rather than a willful exploitation of an opportunity to swindle.
Abrams had insisted that the phrase “moral hazard” be replaced by the more accurate “incentive to lie, cheat, and steal.”
He did the same thing in other op-ed pieces and speeches for other bits of self-deceiving jargon:
“Price stability objective,” which actually meant the rate at which prices rose.
“Core inflation,” which excluded the goods that most cut into consumers’ budgets: food and heating oil and gasoline.
He then moved on to “balance sheet stress,” “favorable supply shocks,” “asymmetric policy bias,” “capital deepening,” and “total factor productivity.”
Abrams’s first instruction to the staff upon arriving at the Fed was that the language it used in its reports and press releases had to be plain enough for anyone in the country with a high school education to understand.
The Wall Street Journal led a protest against the policy, starting off with an editorial titled “Lost in Translation.”
CNBC called it “the names game.”
The first lesson Abrams learned from the experience was that the war wasn’t limited to words and titles. It soon took the form of street battles outside the Fed: police battalions fighting betrayed workers who’d realized that the last four administrations hadn’t been trying to eliminate unemployment, but maintain it-and at levels prescribed by academic theories that were as transient as the homeless.
The second lesson Abrams learned, taught to him by Thornton, was that the economic data the government released to the public were no more reliable than the words in which they were framed. And he discovered why: The statisticians in the Labor, Commerce, and Treasury departments had been vetted over the years for their political views, rather than their academic credentials.
Abrams didn’t trust any of them. And now he feared that his demands for clarity in a cloudy world would drive Thornton away.
He returned to his desk and sat down and asked Thornton, “What’s the bad news you were about to tell me? ”
“The Chinese State Administration of Foreign Exchange announced today that their holdings in dollars have now passed one point one trillion.”
“And when you factor in foreign currencies held outside of the central bank, it has to be double that.”
Thornton shrugged. “That’s my… estimate.”
Abrams reddened. “Sorry about that.”
“I know you weren’t angry with me.”
“What are the Chinese saying about their foreign debt?”
“A couple of hundred billion, more or less. Chump change.”
They both knew that all the figures were unreliable. For more than a decade China had been holding some of its reserves in the names of offshore front companies so that their central bank wouldn’t have to report them.
“But here’s an interesting thing,” Thornton said. “I’ve been watching a slow rise in the value of Japanese yen and Singapore dollars and Taiwanese NT in the last few months-”
“Which leads you to suspect that the Chinese are using some of their dollars to buy other Asian currencies-”
“In the countries from which they get their imports, especially food.”
Thornton handed him a sheet displaying a four-color bar chart showing investment levels throughout Asia for the last two years. She pointed at two side-by-side bars, the previous year on the left and the current year on the right.
Abrams stared at the chart, seeing in the visual presentation what he hadn’t seen in the data alone. He felt his body tense. He looked up at Thornton.
“China is turning all of Asia into an economic colony by becoming its central banker and controlling the flows of currency.”
Thornton nodded, then pointed toward the flat-screen television on his bookshelf.
“Worse than that,” Thornton said. “The last Indian-made Toyota rolled off the factory floor today. I watched it on CNBC this morning. Tomorrow they’ll begin dismantling the plant for shipment to China.”
Abrams’s eyes moved from the blank screen toward the window. He gazed down at the traffic merging at the tip of the sculpture-studded Louise Nevelson Plaza.
“It never crossed my mind,” Abrams said, “that someday it would be cheaper to manufacture a car in China than in India. It’s absolutely astounding.”
He thought of the hundred million Chinese laborers traveling into the cities from the countryside, then from city to city looking for work.
What did Marx call it? Abrams asked himself. A reserve army of labor. Surplus, superfluous people who kept wages low not only in China, and not only in India, but throughout the world.
“I’ll give you a piece of data about China that’s completely reliable,” Thornton said.
Abrams blinked himself back to the present and looked at her.
“The CIA is saying that there have been a hundred and fifty thousand labor actions and riots in the last twelve months. There have even been protests at factories owned by the People’s Liberation Army, and the military is very unhappy. As if to send a message to the Politburo, older representatives of the PLA have been showing up in full-dress uniforms for meetings, even private ones.”
Abrams smiled. “Don’t tell me that the CIA has gone back to analyzing leadership photographs like they did in the cold war days? ”
Thornton smiled back. “I suspect they even know what you’re wearing right now.”
“But at least not what I’m saying.”
Her smile died and her brows furrowed. “What do you mean?”
He cocked his head toward the reception area where Viz was sitting. Abrams had introduced him only as a friend of a friend.
“We found listening devices in my apartment. Two sets.”
The color drained from Thornton’s face as she said, “That means that people were listening to us.”
She gripped her hands together on her lap and twisted them, her knuckles whitened, and tears seeped into her eyes.
Abrams nodded and came around his desk. He reached an arm around her shoulder.
She looked up at him. “That means they heard everything… absolutely everything.”
“But we did nothing either of us should be ashamed of.”