Judy Shelton
Judy Shelton
The Coming Soviet Crash—Gorbachev's Desperate Pursuit of Credit in Western Financial Markets
ISBN: 002928581X
The Coming Soviet Crash
Judy Shelton, author of "The Coming Soviet Crash," analyzed the condition of the Soviet economy. Due to its emphasis on military spending, the Soviets have neglected all other areas of their economic development and thus face a crisis. This crisis is so grave, Shelton said, that the collapse of the Soviet system is imminent. She also talked about the differences between the U.S. and Soviet economies and the issue of whether the West should give economic and technological aid to the U.S.S.R.
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TRANSCRIPT
The Coming Soviet Crash
Program Air Date: April 9, 1989

BRIAN LAMB,HOST: Dr. Shelton, the author of the "Coming Soviet Crash." What's your book all about?
JUDY SHELTON: (Author, "Coming Soviet Crash"): The book has two main parts to it. The first part describes the condition of the Soviet economy, their financial situation. The second part is aimed at explaining how the Soviets are able to get financial capital from the West. My goal was to explain first why the Soviets need the money, and secondly how they are able to get it, cause I think you need to go through that part of the problem before you can begin to address the issue of whether or not the West, and particularly the U.S., should be party to the financing to the Soviet economy.
LAMB: Should they be?
SHELTON: I think not. I think it's a travesty for the people of this country, who have incurred the burden certainly as taxpayers of supporting a huge defense expenditure, to then turn around and work against themselves in financing the Soviet economy when Soviet military capabilities are directly linked to Soviet economic strength.
LAMB: When did you first say to yourself, I feel strongly enough about this issue I want to write a book about it?
SHELTON: Well, I wasn't so much inspired by the policy question we are now talking about at the beginning as by the importance of getting good numbers just as an exercise in doing an academic study of how much the Soviet's actually owed to the West in May of 1984. While I was looking at general levels of global indebtedness I learned that Soviet debt had been systematically underestimated in the West, and people generally felt it was about half what we suddenly learned it truly was. And that struck me as odd, not just in terms of shouldn't we have better monitoring abilities, but this is the Soviet Union, and it would seem to me that our financial relationship with the Soviets deserved more scrutiny than with other countries, and yet the numbers were so bad.
LAMB: What were the source of the numbers?
SHELTON: Well, the Organization for Economic Cooperation and Development out of Paris tracks government credits to different countries and the Bank for International Settlements in Brazil looks at commercial credits. Before May '84 the BIS, this latter group gave out statistics on commercial debt, but they joined forces with the OECD at that time and that was when it was suddenly made apparent that the Soviet Union was indebted to Western governments almost as much as it was indebted to commercial banks. No one had thought that an industrial power like the Soviet Union would be getting these official credits from Western governments. Usually those are reserved for developing countries or backward countries who can't get commercial financing. It's kind of a favor from Western governments to give them a shot at participating in trade, and so the "Wall Street Journal" at that time ran an article pointing out that this is news, and I investigated the OECD reports, the BIS. I went to Paris, I went to Brazil and met with the people who put together the statistics and said, what are you now counting? Are there other figures that we're not including. So my initial emphasis was on the numbers and a concern over what I considered lax monitoring procedures.
LAMB: Where were you at the time you first started your research?
SHELTON: I was at the Hoover Institution. I was working as Research Assistant to Senior Fellow Martin Anderson. He had been Reagan's Chief Domestic Economic Policy Advisor and he was still active in the President's Economic Advisory Board and one of the projects that he had me looking at was to analyze the numbers on the indebtedness levels for a number of countries. So it was in doing that project for him that I noted that the Soviet Union was one of those heavily indebted countries.
LAMB: Your background is in Educations and Finance and Business Administration. Where were you between the time that you were a Ph.D. candidate at the University of Utah and MBA degree at the University of Utah and a BS at Portland State University? How did you get to Stanford and the Hoover Institute?
SHELTON: Well, when I was going into my final year on my doctorate at the University of Utah, at about that time my husband was a banker in a rather large bank in Salt Lake City. He was beginning to think that regulations in the financial industry were such that banking decisions that an individual manager might make could be squelched in an instant by a new law coming out of Washington. He was upset with rules that no longer made it a level playing field for people in the financial industry. So we decided that we would each take about a year to get out of our respective situations and at that time we had been married about four years and my situation was to complete my degree, to write a good dissertation, and his was to to finish one career and maybe have some free time; and in the future we would decide what we would want to do. And, as it turns out my dissertation was composed of two research projects. The first one won an award for the best doctoral paper and was published in the "General Financial and Quantitative Analysis."
LAMB: Subject.
SHELTON: Really, one of those weird intellectual exercises that people in the academic community involve themselves with, it was called an option pricing theory to banking. It tried to describe a risk free investment, which is what a bank deposit is supposed to be in terms of a structure of options as some combination of a put option and a call option which on paper, if combined, would equate a riskless investment with some kind of striking price which I thought was the amount at which you withdrew money. So it was one of those you did lots of little diagrams and numbers and it was clever. I'm not sure it had great application in the real world.
LAMB: What was the other dissertation?
SHELTON: The other one was called "Equal Access and Miller's Equilibrium" and it was an attempt to refute what someone who is sort of a giant in financial theory had said about what would happen if individuals in corporations were taxed at different rates -- who would end up issuing all of the debt in the world? And the idea was if corporations had a 70 percent tax bracket, and they could shield that much income they would be the ones to issue all the, debt and if individuals were in a 50 percent tax bracket they would always issue debt through corporations. So actually it wasn't a refutation so much as, well, if what he is saying is so, then to take it to its logical conclusion and ...
LAMB: This is a long way from the Soviet Union.
SHELTON: My interest has been in financial theory and international banking and economics. And still, for me, international monetary reform is the greater interest and what I will return to. The Soviet Union, because I am interested in revenues and expenditures and all financial issues, when I started focusing on how much they were borrowing, and then why did they need the money, and that got me into looking at their internal budget statement which was then from my accounting perspective which is different than the typical Sovietologist, who is an economist. I got interested in the numbers on the Soviet situation but in a sense this is a specific -- even an aberration from what I considered my first love, which is financial theory and application in international banking and economics.
LAMB: Martin Anderson was a political type?
SHELTON: I think he's both. In fact I think he's a perfect combination of an intellectual from the academic community but a pragmatist who has seen how policy can stem from ideas but ultimately affect peoples everyday life.
LAMB: Is this book "The Coming Soviet Crash" -- those who have just joined us we are talking with Dr.
JUDY
SHELTON: (Author, "Coming Soviet Crash"):, we will be for the next fifty minutes or so. Is this book political or have a political overtone to it? Or political fallout may be the best question.
SHELTON: Yes, I think it definitely is having that already and that's interesting to me, because my focus from the beginning was to produce an analytical study, but what came out of that in going through the statistics on the Soviet budget and figuring out why they are now under Gorbachev making such radical -- taking these initiatives in Western financial markets that on a scale that's never been exercised before by the Soviet Union and in the array of options that they have never had the opportunity to even pursue before -- making the connection between their situation and how they're attempting to rectify it. That analysis then gave way to -- or I should say the policy recommendations that I draw in the book fell out of the analysis. The original focus was an analytical approach, but secondly, it has strong political overtones.
LAMB: What do you think of the Soviet Union?
SHELTON: I think that it's an idea that went wrong. Economically, I think it's doomed. And I don't say that with glee. I've only been to the Soviet Union on one occasion for a couple of weeks. I liked it very much, was treated very nicely. In some ways I am probably a closet Slavophile. I like the Russian language, I work at it every day. I like Russian literature. So one problem with the book, or at least for me, is I've had this sense of people thinking that I want to see the Soviet Union collapse. I don't like the Soviet government. I don't like the Soviet government's emphasis on military strength as its claim to superpower status. I think it's misplaced.

It bothers me that the Soviet government puts first priority of economic resources, of talent, on R&D investment. That all goes to the military. Then comes fixed capital investment for the infrastructure of the countries for factories, for dams, and in a sad third place comes expenditures on behalf of the people. And I think that what I would like to see, I guess, dissipate and collapse is a government that draws its power from these military capabilities, from the potential to reek violence on the rest of the world. I don't think that is a legitimate claim to power. I would certainly rather see those resources transferred from the military sector in the Soviet economy to the consumption sector.
LAMB: Let me ask you, this is way off the subject of your book, per say, but it might help at least me understand how this money thing works. Take Pepsi Cola. I guess you can buy Pepsi Cola in the Soviet Union.
SHELTON: Yes
LAMB: How does that work? How does the Pepsi Cola Company of the United States, let's take it through from the consumer in the Soviet Union who walks up some where and says, "Give me a Pepsi" and here's a ruble -- and I have no idea what's a ruble translated into an American dollar? Any way to do that?
SHELTON: Yes -- well, there's two ways to do it, and one is the official Soviet government's rate of exchange and that says that one ruble is worth $1.62. So they are saying a ruble is worth sixty percent more -- one ruble sixty percent more than one dollar. The other way to to relate those two currencies is to walk on the street in Moscow and stop in front of a bookstore and wait to be approached, at which time you will be offered six to eight times the official rate if you are willing to exchange in this dangerous black market activity of trading in dollars for rubles.
LAMB: OK, but let's go to the Pepsi. I walk up and I am a Soviet citizen and I put a ruble down for one Pepsi. Trace that ruble back to where -- to the Pepsi Cola Headquarters where they eventually have something in exchange for their goods.
SHELTON: Well, I don't know Pepsi's exact arrangement, but there's two ways that that American companies, or any Western company, can do it, can extract some kind of money, some kind of compensation from the Soviet Union. And one way would be you use the rubles that you earn from operations in the Soviet Union to buy goods, inventory, materials to pay Soviet workers, but then you run another operation and the other operation only takes hard currency. For instance, Pizza Hut has a a setup to do that where one restaurant serves Soviet people and they can pay in rubles and then the money that's taken in that way is used to buy tomatoes and cheese and resources, and then it's in the hard currency one where it's not for Soviet citizens. It's for tourists or it's for privileged Soviet people who have dollars or maybe people who may have gotten them illegally, but at any point they only take hard currency and then it's the profits from the second operation that could be repatriated back home. Now another way to do it, and, as I understand it, Pepsi is working on this second way and does some business on the basis of barter where they use the rubles to buy Stolichnaya then they have rights to sell Stolichnaya vodka in the United States.
LAMB: Is it worth it for an American company to go over there and do business?
SHELTON: I don't see how. Even from a bottom line dollars and cents. Not for the Soviet consumer. I mean there is this much-touted great market of Soviet people who are dying for Western-produced goods. Well, they absolutely are. No question. If you came over and put a thousand pair of jeans on the shelves, I guarantee they would be gone in half and hour and you could charge virtually whatever you want because a ruble is so inflated that the people have tons of currency piled up. It's sitting in savings accounts, it's virtually meaningless to them. So they'll just pay it. The most difficult thing for most Soviet citizens is translating the money into consumer goods. It's not getting the money, many have been overpaid for years. So, in that sense an American will find that he can sell his stuff -- then what does he do with all of these rubles? Then he's left to wrangle with the Soviet government as to what's going to be the rate at which I turn in all of this ruble money -- which is going to look like Monopoly to him -- make it meaningful. I don't want to spend it in the Soviet Union. And, chances are, an American is not going to find much that intrigues him in the way of manufactured goods that he wants to then turn around and buy Soviet produced goods. So ...
LAMB: What's the difference between the Soviet ruble and the way American business would interact, and the British pound, for instance?
SHELTON: Well, it's the same thing. I mean the Soviet ruble is an inconvertible currency against all Western currencies. So everyone's in the same boat. The inflation is internal.
LAMB: No, I'm sorry, what's the difference between the way we relate to Great Britain and the way we relate to the Soviet Union? When you say inconvertible, who decides it's inconvertible?
SHELTON: Well, since '73 we've been on a floating exchange system. So our currency is valued daily in the market on the basis, let's say, relative to the British Pound Sterling, as to what the world demand is for dollars versus pounds sterling. So that's constantly being judged by the market by the laws of demand and supply. That is a black market rate. I mean for us the black market rate is a legitimate rate. In the Soviet Union the legitimate rate is illegal. The legitimate would be what you are offered on the street.
LAMB: Who decides that. I know these are terribly simple questions, but for somebody who has no background in it, how do you explain the way this thing works? How could you change so you'd have a convertible rate with rubles -- who makes that decision?
SHELTON: Well, the Soviet government could agree to let its ruble be convertible. It could suddenly say in world markets, what ever people are willing to pay for it, that's -- I mean make it subject to the same rules of supply and demand that the other currencies now follow.
LAMB: Why don't they?
SHELTON: Well, it would be impossible for the Soviet government to reconcile this world valuation of its currency with the artificial rate it has set internally. Because what we are talking about now is how do you deal with the difference of valuation between the black market rate and what the government continues to stipulate that the official value is.
LAMB: If you, I assume you are a capitalist.
SHELTON: Very much so.
LAMB: OK. Just say that you wanted to help the Soviet Union and they called you up and said, "Dr.
SHELTON: come over here and tell us how we can become like the United States." Is it possible?
SHELTON: I don't think it's possible for them to become like the United States if we are talking about personal freedom, which in our country goes right along with economic freedom. They are trying to impose, in a sense, capitalism from the top-down. And, what Gorbachev is doing is borrowing some aspects of capitalism. Unfortunately, the harshest aspects of capitalism which are bankruptcy, the possibility of failing, and unemployment he is using that part of capitalism just as an emergency measure. Now, if I was going to advise the Soviet government from a financial point of view, what they could do to take part in the international financial system, monetary system -- I would urge them to put their money where their mouth is, so to speak, and come up with a gold-backed ruble.

I think the Soviet Union's only claim to credibility with Western financial types is to provide collateral behind a currency. In fact, I think it would be a rather brilliant coup on their part to come out with a currency that they agree to redeem in gold, because they have mythical holdings -- not mythical in the sense that they don't exist -- but bankers eyes just get round when they think of Soviet gold reserves. So there is this implicit assumption on our part that they do have something valuable. And clearly, I think they are the world's second largest producer. They do have gold. So if I were them, I would come out first with a bond that had gold warrants. Maybe three years out.

That way they could provide an instrument that you cannot duplicate in the market. You can't get futures on gold that far out. I think they would get a fantastic premium. Not just because of the novelty of a gold-backed bond, although other governments have done it successfully, but also because the Soviet Union there is the novelty of them being relatively new borrowers in the Eurobond market. So I think they would get a double premium. I don't think they'd ever have to redeem the gold, as long as nothing radical changed with the Soviet Union in a negative way politically. So there is that risk. Of course, it would be in our interest to give them incentive not to let anything radical happen involving any violent suppression of say republic movements.

I also think if the Soviets were to do this, they'd be somewhat exposed when it came time to redeem the bond, if the price of gold had gone up because then this warrant would require them to furnish gold at a cheaper price than it was available on world markets. But, with the Soviet ability to influence the world price of gold, I even think they could protect themselves on the downside by reducing the price just about the time they'd have to redeem. Now I don't know why I want to give all this great advice to the Soviets, but I think that it's healthier for us to get out in front of Gorbachev. What I think he's starting to do now is set the terms of trade and he's doing rather well at negotiating a welfare payment mentality in the West where I think we're willing to make a one-way transfer of physical and financial capital in the Soviet Union.
LAMB: Why are we willing to do that? And, who's willing?
SHELTON: Well, I hope we're not. But, certainly our allies -- West Germany, England, France and Italy -- have been making tremendous reserves of cash available to the Soviets.
LAMB: Why do they want to do that?
SHELTON: They are victims, I think, of this entrenched political quid pro quo that says if the Soviets make progress on arms control, on human rights, on regional conflicts, we will bail them out with economic and financial favors. So, I think these West European countries and Japan are now saying "Well, the Soviets are performing -- we now have to come through on our part of the deal, let's pay them off." And Britain's just concluded a over a billion dollar trade negotiation. They've agreed to, at the expense of the British government, train Soviet managers at the London Business School. So clearly the governments are intermingling with what should be private commercial transactions, and they are pushing this agenda of providing financial assistance to the Soviet Union.
LAMB: Do American government leaders feel greatly different about this in your opinion from what you've seen than the West Germans and the Great British and the Japanese?
SHELTON: I think they feel somewhat different.
LAMB: And if they do, why?
SHELTON: The big reason is because the United States bears the brunt of the defense burden of the West. So to U.S. citizens and to our leaders it appears at the same time we are protecting Europe through our NATO commitment, they are undercutting us by giving this economic succor to the Soviet Union, which certainly enhances the total amount of resources available to the Soviet Union and tapping into what I said earlier about the military sector always having a priority claim on resources. I think in the United States we feel that the Europeans are contributing to Soviet military potential and we have to then match that concurrently in defense costs to match any new escalation of Soviet military capabilities. So, I think it is very disconcerting to the United States to see its allies moving ahead so strongly.
LAMB: When did you go to the Soviet Union?
SHELTON: I was there in September 1987.
LAMB: And had you finished your book yet?
SHELTON: I had finished the original draft and then I did subsequent work updating statistics.
LAMB: Were you there on business or pleasure?
SHELTON: Really pleasure. Just wanted to see it. As I say, I have no problem with the Russian people or the Russian heritage. I have real differences with the Soviet government and its priorities, but I enjoyed my visit.
LAMB: Did you change your mind about anything from what you thought the place was going to be like during the time you wrote the book and when you got there?
SHELTON: Things were worse that I expected. My study was based on numbers and looking at government figures and statistics. When you see economic problems on paper, it doesn't hit you as hard as when you go out and see decrepit buildings and lousy roads. Most telling for my husband and I was we had wonderful guides both in Moscow and Leningrad, and the young lady who took care of us in Moscow, she accompanied us to dinner and at the end of the meal sitting on the table was a little stand with some bad peaches. I mean, visibly rotting with holes on them peaches.

And we had had a sumptuous meal and our guide wasn't interested in having any, but she looked around at the end of the meal taken away the last of the plates and she whispered, "Are you going to eat that fruit?" And we said, "No, no we're not." She said, "Would you mind if I had some?" "Of course, help yourself." And she looked around and she opened her big bag and she dumped it into her bag and the next morning told us her son thanked us, her mother thanked us, her father thanked us, and it was the first fruit they'd had that year and the contrast between the way we were treated.

Actually I think we had luxury accommodations and great meals contrary to what a lot of people have told me their experience has been. And this very telling example from this young lady, who had a pretty good job, made me realize in addition to what I was observing on the streets, the lines in the stores, the general run-down condition of virtually everything had a stronger impact than the numbers ever had.
LAMB: Can you explain in addition to what you have said here in your book about the difference in the economic situation, what it is about our country and the way we run our economy and the way the Soviets run theirs that creates a different mentality in the on the part of the people? What are the different elements of it that, I don't know that I am being very articulate, but create more consumer goods and better goods? And contrast the differences. What is it?
SHELTON: Well, there's a long answer and a short answer and the long one gets into the structure of the government and who owns the means of production. The short answer I think is the lack of competition. When you have central planning dictating the production of goods which then causes managers to fulfill a a quota rather than have a real interest in what consumers might prefer to have, you lose innovation in production and manufacturing. There's no point in coming up with something bigger, better, because there's no incentive to do so. Why take the risk.
LAMB: Go back to those peaches. Would you expect in most American situations, those peaches would be good?
SHELTON: If it were a private restaurant that got its business on the basis of word of mouth, and people here I think have pretty tough standards on what they expect in restaurants. I think the differences there if you get bad peaches, who do you complain to? The restaurant's commissioned by a central authority and clients complaining does very little in determining the future or the viability of that restaurant in the eyes of the central planner.
LAMB: Is there anything about the Soviet society that you saw in consumer goods that were equal to what we have here, in your opinion?
SHELTON: Caviar. The caviar
LAMB: Cars?
SHELTON: The cars, no. The cars were rather horrid.
LAMB: The hotel?
SHELTON: The one in Moscow we stayed at was adequate. The one in Leningrad was excellent -- it was built by the Fins, so I can't complain. But, I think my experience was unique. Again, other American visitors are shocked when I tell them that I actually had rather nice accommodations.
LAMB: What about their airplanes?
SHELTON: I flew PanAm. I don't know, I didn't take Soviet airplanes. I did take the Soviet train, but again it was again a rather romantic experience, it was pleasant. It was all right. I mean in some ways the Soviets can perform. Think of that industry, trains. Something like that lends itself to central planning, I suppose. I mean we really have Amtrak. Our train system is not an area that is characterized by a lot of competition. So I think they can do all right. I mean look at their space program. Look at their military abilities. There are some areas that the Soviet government has pinpointed and when you put all that power and resources behind a few selected projects, they are going to come out all right.

The problem is the variation in the system to be able -- I mean, literally to send people into outer space and not to be able to produce acceptable shoes for children, the contrast is just terrific. And, I think it's the distortions, the pockets of innovation and state-of-the-art technology, which in the Soviet Union tend to occur in the military sector again versus in the consumption sector where they're still using an abacus and make you line up three times to purchase a book or anything. The Soviet system where it relates to consumers is so backward that that I think is the sin of the Soviet government. Neglecting Soviet citizens in favor of becoming a superpower thug.
LAMB: Could you sense from visiting there for the short time that the people there are happy, unhappy? How would you compare them with the general mood of the Americans?
SHELTON: That's a question that reflects human nature. I'm not sure that a highly consumer society means greater personal happiness for an individual. The people I met were happy enough. I think they had that Russian characteristic of being resigned. I think they are much more passive than Americans. We're so demanding. If something is not up to snuff, we call the manager. In the Soviet Union they shrug it off, and if they get lucky, they are able to buy this or that. It's good fortune, but you wouldn't begin to see irritation of like you would in the United States.
LAMB: You said earlier that a day doesn't go by that you don't fool around with Russians in some way. Why?
SHELTON: I've always liked the literature, Tolstoy and Dostoevsky and Pushkin and Gogol and what I'm trying to do now is I'm trying to memorize "A Day in the Life of Ivan Denisovich" by Solzhenitsyn. So I have tapes of Solzhenitsyn reciting his work. Then I have a Russian ...
LAMB: In Russian or English?
SHELTON: In Russian. And then I have the work in Russian and I have it in English and I have about four English/Russian dictionaries and every morning for an hour I start reciting what I have memorized so far and adding on to it and working my way through the book.
LAMB: Why?
SHELTON: It's a great pleasure. I think the way you get a feel for a language is, unfortunately, through this exercise of memorization. So, I need to hear it and read it and think about it so it has meaning to me personally -- to really embrace it. And, it's just nice to see the different perspectives on life that can show up in one language versus another. The way some things expressed in English -- then you read the same paragraph in the original Russian -- the nuance may be slightly different and it's just a pleasurable exercise to feel like you're capturing that.
LAMB: Did you get interested in Russian literature and language as a result of your book or is this something you've always had?
SHELTON: I've been interested long before I was focusing on the more economic financial numbers problems of the Soviet. This is just a parallel interest, and a couple of years ago at our house out in Middleburg, my husband
LAMB: Middleburg, Virginia
SHELTON: Yes, in Virginia. He indulged me by -- we contracted with a gentleman who had set up a satellite system for Columbia to listen in on Soviet television. We set up the same operation at our house and it involves a big dish and a little computer. And since the Soviet satellite is not geostationary and I am not -- I don't know anything about these things except what was explained to me, but the Soviet satellite keeps moving. So the trick to latch on to it is to get a system that can follow it and track it. So our dish now wired to this computer does a little search about every eight minutes, figures out which is the strongest direction, the strongest signal, and locks on to that and follows that for a little while -- in the meantime feeds through and in my office set up in the house. I can watch color Soviet television from about 4:30 in the afternoon to about 7:30 in the morning that comes out of Ladevestock, and then I get live Soviet radio straight out of Moscow all day long. So, it's a pleasure for me to hear the language. I enjoy that. I don't pretend to understand all of it, but I can get some of it and every once in a while there is something interesting that comes on the news.
LAMB: What have you learned by being able to peek in on their television system?
SHELTON: Well, some of the things that have already been noted by others and that is that Ramia has much more use of graphics and marketing and is a much more lively show than it used to be when -- now they still lapse into statistics of grain production and this republic fulfilled its quota on grapes. It gets pretty boring. In some ways it's the old Soviet style of giving the news which means, look comrades, your fellow comrades are just doing a swell job in the Ukraine. It's a little more -- has a little more flair. One thing I still resent on Soviet television on the news is whatever was the worst story that week in the United States maybe something awful -- a Klu Klux Klan demonstration or a someone goes crazy and shoots four people. Boy, that's the first thing on the Soviet news. In the United States this week, bam. They show the worst side of us. And I think we are so much more forthcoming about showing positive things and casting a human light on the Soviets than they are toward us.
LAMB: If you've just joined us, we're talking about this book which is published by Free Press and is called "The Coming Soviet Crash" and our guest is Dr. Shelton who is a Research Fellow with the Hoover Institution at Stanford University -- and this book has a copyright of 1989. When did you finish it?
SHELTON: I finished it about February of '88. And, I did some updating of statistics -- the latest numbers that were available to me maybe as late as May and bringing some tables.
LAMB: What is the publisher, Free Press?
SHELTON: It's a division of MacMillan in New York.
LAMB: And, is this meant to be a consumer book?
SHELTON: I think it's a hybrid. MacMillan is more of a textbook publisher. The Free Press, the publisher is Erwin Glickus, who has a lot of experience with other major publishers who aim their books at people who walk into bookstores off the street. So this is his special project to produce books that have somewhat of a scholarly approach that are analytical, but the policy implications are important to members of the public. So it's a trade book in the sense that I think someone who has an interest in the Soviet economic situation, who is aware of policy implications in our relations toward them, might pick it up and get a better understanding.
LAMB: Anybody react negatively to your book?
SHELTON: Yes.
LAMB: Who?
SHELTON: It was received, I would have to say -- and maybe I'm giving the benefit of the doubt in my own favor -- it got mixed reviews. It was reviewed by Marshall Goldman of Harvard Russian Research Center this past Sunday on the front page of the Book Review of the Los Angeles Times. So the good news for me was that it was reviewed by a pretty big gun in this country on Soviet economics. The bad news was he suggested that I was -- and these words are stinging; that's why I remember them -- unduly an alarmist about Soviet financial initiatives in Western markets and their escalated borrowing activities. The reason he said so was because he felt the Soviets in the past when they have borrowed they tend to retract and that their borrowing now might be followed by a period of reducing their debt to the West and he said that was based on their traditional behavior. I think there is some validity in that, although they have never borrowed nearly to the extent that they have now. Under Gorbachev it's a brand new game what they're doing, not just the total amounts but the options.
LAMB: Who's loaning money to them?
SHELTON: Western Europe --West Germany, Britain, France, Italy, Japan.
LAMB: Who's the biggest, do you know?
SHELTON: West Germany.
LAMB: Did this review go on to give you any credit for anything, or was it all negative.
SHELTON: Yes, actually the nice part was he said in my book -- which I finished, as I say, almost a year ago -- I made the declaration that the Soviets were not running a budget surplus, they were running a massive budget deficit. And I think people thought, how do you know that? Well, this past October -- my rational for it and my explanation -- it is in the book based on the numbers -- what has to be the case walking through their financial statements on a step by step basis. In October, their Finance Minister, Boris Gastef [?] announced before a very shocked Supreme Soviet that contrary to what we have been telling you for years, we are running a budget deficit. And at that point he said it was 36 billion rubles, which is about 58 billion dollars, which would be 3.6 percent of Soviet GNP.

Three months later, which means this past January, one of Gorbachev's closest economic advisors Reinita Baltkin [?], he said not only are we running a deficit, it's three times the amount Gastef [?] admitted -- it's over a 100 billion rubles. So now we're talking about 10 to 11 percent of Soviet GNP. I think it's even higher than that, probably closer to 15 percent of Soviet GNP.

But, to answer your question -- Marshall Goldman said that my work -- which is based on some earlier work that was done bringing figures up through the mid-70s by Igor Bearman -- I followed his techniques in extending the analysis -- Goldman said both Bearman and I had been vindicated. So, I was grateful for that, and I even called Igor Bearman and told him, "You will be happy to know that you've been vindicated by Marshall Goldman." To which he responded, "I was happier to know I was vindicated by Gorbachev." Because Gorbachev himself last month said, "Our massive budget deficit is the most serious, dangerous part of the legacy we inherited from our predecessors and stands in the way of our progress in the world."
LAMB: Have the Soviets read this book that you know of?
SHELTON: On your program, C-SPAN covered a seminar I addressed several weeks ago. The day after a representative from the Soviet Embassy called the American Conservative Union who had sponsored that program and asked for a copy of the book and they said come in and we'll sell you one, because they had bought a few. And we joked about hard currency only, no rubles. They just informed me this fellow with a very thick Russian accent had called. Well, last week they told me that -- well, I guess his response was, "I will have to get approval to buy the book in cash." He came in the following week, they told me, with a hundred dollar bill and said, "I would like to buy
JUDY
SHELTON: (Author, "Coming Soviet Crash"):=s book." They couldn't make change -- they didn't have the money. So, they said, take the book and when you change it come in and give us the money. He said, "No, No. I will change it and then I will come back, pay you cash," and he left.

Well one of the gentlemen at the American Conservative Union noticed that part of the man's heel had fallen off and was sitting on the floor and sure enough about two hours later this Soviet gentleman from the embassy came back, he handed them the money in cash, he changed it, and they gave him the book and pointed out that he had lost part of his shoe and he took it and thanked them and was walking out the door and he turned around and said, "I guess my plan to leave a microphone in your office didn't work out." And, they were laughing and I think that the ideas there are images on both sides.

I don't know that the Soviets are watching "Get Smart" reruns but they understood the joke that there's essentially distrust. I'm sure the Soviets react to this book as a Cold War mentality. I think they said something to these people when they bought the book there of, "Why do you want to put more missiles in the world? Why don't you want to have international cooperation?" And I think that is the Soviet approach to a book like mine that says it doesn't make sense for the West to loan you money, that says your budget is in catastrophic condition because you have devoted so much of it to the military. And I think the last refuge of a scoundrel is to say, is to respond to that criticism by saying you just don't want peace.
LAMB: By the way our producer of this program, Greg Barker has a copy of the LA Times review by Marshall Goldman which was in the, I don't know the date on there, February ...
SHELTON: Twelfth.
LAMB: Twelfth. I'm just going to take a look at it. Off the subject a little bit. The Hoover Institution at Stanford, what is it?
SHELTON: It's a gathering of scholars, a think tank is what it's usually called. There are a number of Nobel Laureates, including Milton Freedman, Edward Teller. It's a place where you can do research on domestic policy issues, on foreign policy issues, with absolutely no dictated agenda, no one ever told me what the parameters of my study would be. I proposed what I wanted to look at -- which when I was originally given a grant a postdoctoral grant from Hoover, it was to analyze the impact of Western capital on the Soviet economy -- that's what I wanted to do. For all I know my conclusions might have turned out that it's a very healthy impact and there should be more of it. The point is Hoover didn't ask me in any way to define my potential conclusion. It's really an organization dedicated to research with policy implications which might affect the welfare of the public.
LAMB: Hoover is at Stanford and Palo Alto, California, but you live in Middleburg, Virginia, 54 miles from this studio. Why? How do you get to do that?
SHELTON: Well, I was Research Fellow or a Research Assistant to Martin Anderson for about 18 months and then I submitted, with his blessing, this proposal to specifically focus on Soviet debt. And at that point, I received a two-year Fellowship from Hoover through the National Fellows Program. The particular type of Fellowship I received -- the tradition was that people spend part of the time at Hoover, and they went to Washington where they were free to affiliate with the American Enterprise Institute, if they needed that, or to just pursue research. The idea being that public policy issues are often decided in Washington and some of the best statistics, resources, and people involved on a particular topic, the institutions in my case -- World Bank and the IMF, Senate Banking Committee and House Foreign Affairs Committee -- the action was in Washington, so I came here to do that part of my Fellowship. And when my Fellowship ended, I was well into the book. I was still doing research in that area -- still needing access to statistics to update, and policy things were breaking everywhere because of the action Gorbachev was taking. So I wanted to continue my affiliation with Hoover, and they made me a Research Fellow which now puts me as a member of the scholarly staff. I have access to the archives at Hoover which is tremendous in the area of Soviet studies, East European studies. I'm in contact with Hoover scholars two to three times a week, and I go back and forth for seminars at Hoover when it involves this subject.
LAMB: Then with your husband in Middleburg, Virginia -- any children?
SHELTON: No.
LAMB: We have about ten minutes. We have to wrap it up and we have a lot to talk about yet. I assume somebody -- that if they want more you will have to go out and buy this book which at $22.50 probably wouldn't be unpleasant to you. There is a chapter called "Proper Prospective." Once again, the title of the book the "Coming Soviet Crash: Gorbachev's Desperate Pursuit of Credit in Western Financial Markets." Because we have only ten minutes, I'm going to have to go through these quickly, but you have a number of points in this last chapter that I want to briefly explain. Number one: don't lose track of Moscow's fundamental problem.
SHELTON: There I think we need to focus on this massive budget deficit which means they don't have the internal resources to fund the military investment and consumer spending as much as they want. So we have to interpret all political initiatives by Gorbachev in terms of what must be his fundamental problem, one to which he has admitted.
LAMB: Two: don't underestimate the importance of trading with the West for the Soviet Union.
SHELTON: There's a tendency for businessmen in the West to downplay the importance of trade with the Soviets because then they can say it doesn't matter -- we can't effect the Soviet economy, so why don't we just go ahead and do business. And the point I want to make is, it matters a great deal. Soviet government is effectively the agent. They can bring in goods from the West and sell them for tremendous profit. It helps plug up a hole in their financial condition. It's also the only way out of their economic conundrum right now. They need goods imported from the West to get workers to be motivated to work more productively. They need the technology from the West to improve the productivity of their equipment. It's just vital for them to have this trade with the West -- it's not something to be dismissed.
LAMB: Three: don't be excessively flattered by Soviet moves toward capitalism.
SHELTON: Yes, this is a psychological problem. We start telling ourselves that the Soviets have finally seen the light, and they are moving to our way of thinking. We have to remind ourselves that what Gorbachev is doing is not capitalism. He's just taking a few expedient elements of capitalism -- again the harshest elements -- bankruptcy and unemployment and failure -- and using that because he is in an emergency situation at home.
LAMB:. Four: don't promote a personality cult for Gorbachev.
SHELTON: This I think everyone is aware of. It's easy to do. We focus on this personality. We have this tendency to want to deal with the man when we should be dealing with the system. We have to tell ourselves that Gorbachev could be replaced tomorrow by the Soviet Minister of Defense or the head of the KGB, and we don't want to suddenly have our whole policy toward the Soviet Union disrupted because they have changed people at the top. I think it's a big mistake to focus on personalities and could just have terrible implications for our over strategy toward the Soviets.
LAMB: Five: don't trade economic and financial assistance for Soviet political concessions.
SHELTON: This is a very tough one because the United States -- it especially bothers us when people are not allowed to immigrate. It bothers us when dissidents are thrown into prison. And we have this desire to do whatever we can to help them. And so, for example, the Jackson Vanic [?] Amendment -- there is this quid pro quo that if the Soviets start complying with what we consider standards of basic human decency we will give them most favored nation trade status and allow them eligibility for government-backed trade credits. That I think is a not just an inappropriate trade off, but a crass situation to be talking about human rights -- life and death, on one hand, and financial favors on the others. So I would move away from that linkage.
LAMB: Six: don't get confused over labels. It's all a transfer of capital.
SHELTON: Well, this just focuses on the monitoring problem. Capital is now flowing to the Soviet Union through joint ventures because equity capital is not so much different from debt, and yet, although it doesn't get picked up in the debt statistics, it's still a transfer of Western financial resources. There are the Eurobond offering that the Soviets now started, and those are not picked up by the BIS figures or the OECD so I think we need a new online monitoring system to just keep track of our total exposure to the Soviet Union financially.
LAMB: Seven: improve monitoring capabilities.
SHELTON: Same idea.
LAMB: Eight: the United States must lead.
SHELTON: Again, this is the tough part of the policy issue. I'm convinced that right now our allies are working on James Baker to get him to go along with this let's-help-Gorbachev approach. I think the United States is going to have to make its position clear to our allies that if our goal is to get the Soviets to transfer resources out of the military and into the consumption sector, the last thing we want to do is to relieve that pressure -- that internal economic pressure -- to make that change by providing the consumer goods from the outside with our own money. In that sense we're giving a reprieve to the Kremlin and we're just stopping this transition process that I think any Soviet leader, not just Gorbachev, would be compelled to respond to. And so we don't want to reduce that pressure. We want them to have to make that decision of butter versus guns on their own.
LAMB: Are you at all surprised by any other aspect of writing a book and the reaction that you got. Was it difficult? Do you hope to do it again?
SHELTON: The book was a terrific exercise. You can't say things loosely -- you verify all of your facts and figures. You think through your conclusions and you decide what you're willing to go to bat for. The book is getting more attention than I would have ever hoped for, but it's very gratifying that it is. I think this is a profound issue for every American taxpayer. He's the guy paying the bill for defense. He has to be concerned about policy that might end up with his dollars effectively subsidizing loans to the Soviet Union.
LAMB: When did you know -- and what aspect of this book first got people's attention? When did you know that that this was going to get reviewed and it was going to make a difference?
SHELTON: The Soviets have done the best PR for me because as the book was going to press and the copies were in galley form -- that's when they first made the announcement that a budget deficit existed. For forty years they have been saying it's a surplus. So there I am going on record in print saying it can't be. It's got to be a terrific deficit and here's why. Well, to have my assertions confirmed to the Supreme Soviet, by the Finance Minister, was a boon and I think the people thought maybe there's other things in there that are worth looking at.
LAMB:. Did they do it because of you?
SHELTON: I'm sure it would be delusions of grandeur for me to think so. But, a review copy was made available in early December to Tass. They demanded it in a typewritten request to my publisher to see a copy of the book -- and I think he tried to hedge a bit and they demanded again more strongly a week later. I don't think it's just me. There are a lot of other people now who are saying the Soviet's are running a deficit and it may be that the pressure was such that they felt they should come clean even if at first they just admitted a little, and now they are saying three times as much as we said at first. I think they are responding to pressure from me and others in the Western community --Sovietologists, especially people who look at the financial points responding to that.
LAMB: This is what the book looks like. The title of it is "The Coming Soviet Crash" and our guest for the last hour has been Dr. Shelton who is a native of Los Angeles, currently lives in Middleburg, Virginia, has a Ph.D. in finance from the University of Utah, a masters from the same school, and a bachelor in business administration from Portland State University. Also has studied at UCLA and is currently a Research Fellow at the Hoover Institution at Stanford University. Thank you for your time.
SHELTON: My pleasure. Thank you for having me.


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