Notes From the Rabbit Hole
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Pivotal Events
By Bob Hoye February 24, 2010
The
following is part of Pivotal
Events that was SIGNS OF THE TIMES: Last
Year: "The
amount of money in the economy is growing too slowly – needs
boost." –
Bank of England Governor, Mervin King, February 26, 2009 This
inspired our departed friend, David Brown, to draw the attached
cartoon. The
unexpected second part of the crash to early March resolved when the
ChartWorks on February 27, A
Significant Change, called for a weaker dollar, which would "likely
be sufficient to overwhelm extreme dismay". A
post-crash rebound was becoming possible. The
March 2 ChartWorks updated the S&P and noted that our indicators
were getting very oversold and that the 643 level could clear the
market. It cleared at 666 on March 10. *
* *
* * For
some time we have been playing around with a title for an imaginary
article "Great Moments In Disco", along with one about
"Great Moments In Macroeconomics". Well, it has always
been impossible for the former, and, sadly, it now seems too late
for the latter. "Rethinking
Macroeconomic Policy" "What
is clear, however, is that the behavior of inflation is much more
complex than is assumed in our models. And we understand the
relationship between activity and inflation quite poorly, especially
at low rates of inflation." –
Prof. Olivier Blanchard, Econometrician, MIT, February 2010 Score
one more for the tag team of Mother Nature and Mister Market. The
recent scare in the sovereign debt market seems to have eased a
little. International
Relations and Security Network had a good headline "Greek Tragedy Averted",
but there seems to be a general lack of boasting that the problem
was "isolated" or could be "contained". Such
problems are the result of "easy" credit which is one of
the features of a new financial era and the consequence has always
been a long contraction. Events following the financial mania the
climaxed in 1873 have always been instructive – particularly as
the US had a Treasury System that was celebrated as superior to a
central bank. America was then between central banks. During the financial asset speculation that completed in 1873, Sterling was the reserve currency and London was the world’s financial centre. S.G. Checkland is an economic historian and the following is quoted from The Rise of Industrial England, published in New York in 1965: “The American
cotton crop could now earn more abroad, and by 1870-1 was of immense
size, greatly aiding the recovery of the United States, though
damaging the commerce of India and Egypt.
Activity soon became more brisk, and though American iron
output increased rapidly by the spring of 1871 Britain was receiving
very large orders for iron. The
task was resumed of completing the world’s telegraph system,
including China, Australia, and both sides of South America. Foreign
government financing mounted to a crescendo between 1870 and 1873.
Germany, Russia, Austria, and other countries, at last in a
position to engage fully in the industrial race, were making
increasing haste to equip themselves, straining every nerve.
Eastern and central Europe were swept by a promotion mania.
New foreign borrowers appeared in London and found
acceptance. Many
half-barbarous states pressed eagerly for funds, and spent them with
no display of wisdom, sometimes to compound, at extortionate rates,
old debts, sometimes in hopeful response to the blandishments of
projectors. Among these
casual states were Turkey, Egypt, Honduras, Romania, and a swarm of
South American countries. “We are to them”, said Walter Bagehot,
“what the London money dealers are to students at Oxford and
Cambridge”. For
promoters busied themselves stimulating in such countries a sense of
the need to borrow, and its bewitching simplicity.
The British colonies of Canada and Australia also made their
claims. Under the new
pressure of transactions the Stock Exchange in the ten years down to
1873 at least doubled in size.” A few pages later, Checkland starts a section with: “The long
failure to recover after 1873 provoked much discussion.
At first there was a strong tendency, especially in the
absence of crisis, to minimize the difficulties.” The
irony in Checkland's text is evident with the urge to lend money to "half-barbarous
states" and the "need to borrow and its bewitching simplicity", and
then the tendency to "minimize
difficulties". These
events occurred well before the cult of omniscient economics, but as
with any financial mania there was an agency brilliant enough to
prevent a boom from crashing. In 1873 it was the US Treasury and its
celebrated secretary. We have frequently mentioned that mainstream economists intensely discussed The Great Depression (1873 – 1895) until 1940 when they discovered another one. (For example: Investment and The Great Depression – W.W. Rostow, Economic History Review, May 1939). Financial
history suggests that when the bubble in sovereign debt collapses it
takes a long time to wring the excesses out of the system. For
example Barings failure in 1890 was due to the attempt to bailout
the collapse of the Secretan Copper Corner in 1888 and the amount of
Argentine debt carried in its book. Barings was one of the most
important merchant-banks in history. Of course there is no guaranty that the classic post-bubble contraction will continue to follow the path, but then there is no guaranty that it won’t. Best to be informed and to consider the odds.
bobhoye@institutionaladvisors.com
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