Talbot’s Last Lament

Spare a thought for the ineffable Paul Krugman who was musing only the other week that what America needed was, if not quite a war, then certainly a good, old‐fashioned war scare, to dissolve the few remaining constraints to unsound finance and ruinous inflationism.

One shudders at the inopportune nature of such quackery, given that, on the tenth anniversary of the 9/11 attack, there are those who still harbour dark suspicions as to what actually transpired and who the perpetrators really were of an atrocity which however faithfully reported did irrefutably open the doors to a what seemed welcome burst of Military Keynesianism in the aftermath of the Tech bust.

Friend Krugman, indeed, must be inwardly fuming that—so far, this season—his native land has suffered a relatively light toll of storm damage from the hurricanes which have grazed its coasts—in part, because he will have been itching to attribute them falsely to the chimera of man‐made climate change and, in part, because he is perhaps the world’s most prominent advocate of breaking windows as a route to economic vibrancy.

Indeed, one wonders whether his febrile imaginings stretch to what surely must be, for him, a grand resolution of America’s ills whereby its vast, surplus stock of unwanted condos is crammed full of the evil bankers who hold the liens upon them, then fitted with wings and piloted remotely through the heavens to rain down an arbitrary destruction upon whichever ‘monsters abroad’ his political masters happen last to have sought out and down out for a convenient destruction.

Against Stupidity…

Setting aside such flippancy, it is discouraging next to ponder upon the words of the world’s own multi‐armed monetary Krishna, Ben Bernanke.

Though it has elicited a great deal of last‐ditch optimism among the Polyannas and Panglosses that it will soon usher in an asset‐boosting surge of intervention, the Chairman’s two most recent takes upon the economic outlook struck this observer as being a great deal less arrogant and cocksure than were his offerings the same time last year when he launched his ill‐advised second programme of quantitative easing.

For example, while he is now quick to justify his woefully inaccurate prognoses about the course of the recovery by an appeal to the unfortunate impact of those higher commodity prices (with which his policies naturally had nothing to do), it is not that long since his own pet economists—if not exactly the man himself—were enthusing in that back‐to‐front, jejune academic way of theirs about the theoretically beneficial role of high oil prices in reducing real interest rates and hence stimulating the economy!

Beyond that, we can discern a note of querulous bafflement in his ludicrously uncomprehending description of the process of healing a bust:‐

Why has this recovery been so slow and erratic? Historically, recessions have tended to sow the seeds of their own recoveries as reduced spending on investment, housing, and consumer durables generates pent‐up demand. As the business cycle bottoms out and confidence returns, this pent‐up demand, often augmented by the effects of stimulative monetary and fiscal policies, is met through increased production and hiring.

Pent‐up demand? Pent‐up demand?!?

I have had a pent‐up demand for a Lamborghini since, as a small boy, I was bought a model of the Miura featured in the opening shots to the original ’The Italian Job’. I have had a pent‐up demand for a lakeside villa since my dear lady wife outlined something of the manner to which she would like to become accustomed. I have had a pent‐up demand for a bottomless glass of Guinness since I first learned to appreciate a drop o’ the black stuff in my teens.

Somehow none of this has served one jot to get the assembly lines at Sant’Agata humming any more urgently. None of this has motivated even a humble realtor—much less an architect or a builder—to scout out a suitable lacustrian spot and break ground for my/her dream home. None of this has stirred the boffins into a flurry of white‐coated action in the research labs at St. James’ Gate in Dublin.

Somehow, no matter how hard I rub the oil lamp, no Genie appears to grant my three wishes. No matter how many sixpences I put under my pillow, the Tooth Fairy always fails to materialize. Even though I am sure, each Christmas Eve, to leave a glass of sherry and a mince pie—as well as a carrot for Rudolf—Santa positively refuses to slide down my chimney and fill up my stocking in the wee, small hours of the morning of the big day.

Failing such a storybook outcome, the only way my demand can become ‘unpent’ is if, by my prior production of some quantum of marketable value, I can express it by spending either the current or accumulated income this has brought on whatever it is that has meanwhile become ‘pent up’. My
burning desire may well prove the motivation, but it can hardly supply the means for its own satisfaction.

Only a Keynesian could be so facile as to think that a recession comes about because, for some strange reason, too many people capriciously stop wanting things badly enough for everyone to be able to find a job in providing them, or that recoveries subsequently come about—POOF!—because those same awkward customers suddenly change their minds and decide that—after chafing too long under their self‐imposed abstemiousness—they do want something after all!

Not for them any difficult issues such as the compatibility of plans, the role of societal time preference, the minutiae of the capital structure, the entrepreneurial impulse, the profit motive, the marginal productivity of labour, tax disincentives, the regulatory burden, property rights, legal certainty, political stability—or the desirable absence of cockamamie policy initiatives being showered down, willy‐nilly, from on high!

…the Gods themselves…

Meanwhile, Bernanke’s European counterpart—his characteristic sang froid presumably evaporated in the heat of an internal dispute with his German colleagues—insists upon the spotlessness of his record by rehearsing over and over the empty mantra, ‘We have delivered price‐stability!’

Let us not quibble too much that what he means by ‘stable’ is that his one, selective measure of Europe‐wide HICP, the value of the people’s money has ‘only’ fallen by around a quarter in the past 12 1/2 years. Let us instead spare a brief moment to think about the fact that the policy allowed a near 35% discrepancy to open up between the German and Greek components of those indices (with a gap c.20% in the case of Germany versus Spain and Ireland).

The direct consequence of this hidden instability has been the intertwining of that trinity of Gordian knots which we are struggling in vain to unpick today, to whit:‐

• the fact that lenders have been gulled into financing the huge current account gaps consequent upon this disparity in cost competitiveness as though they were riskless;
• the implied divergence in real interest rates (especially in relation to those to which borrowers had long been acclimated) has encouraged several fantastical property booms and busts to take place in the periphery;
• the insidious fiscal creep of the boom years (by which we mean the progressive extension of unfunded entitlements amid chronically lax budgetary discipline practised when skies were blue), an indulgence which set us up for an imminent fiscal collapse once the New Era reveries were dispelled and the public sector had become the only place to park or underwrite all the bad loans of the Go‐Go years.

Tragically, after four years of an increasingly costly attempt to avoid implement the best (the only?) means of resolution, the Germans are now signalling that their citizens’ money and their Republic’s credibility might be best – and most easily ‐ put to use recapitalizing their own, not others’ banks and insurers when they finally recognise officially what they have known all along, namely, that their debtors cannot possibly repay in full, and cannot raise the funds in the normal fashion.

Let us also think about the wild swings in European asset prices (surely something to do with monetary policy?) which have seen stocks rise 50%, fall 60%, rise again 130%, fall again 60%, rise 80% and slide 27% so far during this period of alleged calm.

Mais, oui, M’sieur Trichet! You may have delivered price stability by your own narrow lights, but yours has ultimately been the stability of a coma patient, hooked up to a ventilator and a heart monitor in the ICU of the local hospital. Indeed, in the case of the browbeaten Irish, it seems that you are even the one who inflicted their injury.

…Contend in Vain

High up on this list of lunatics in charge of the asylum must feature Philip Hildebrand of the SNB. Having damn near bankrupted the institution in the course of 2010’s disastrously‐gameable forex intervention, he has once again succumbed to the mentality of the Russian Front by pegging the franc to the ailing euro—a move which offers anyone in the south of the Zone a free option to escape the worst effects of any ejection of their countries from the system at the cost of a potential destabilization of the entire monetary and financial structure of Switzerland.

Having been educated at Harvard, Herr Hildebrand presumably cannot be unaware that when you presume to sell a good at below its clearing price, demand for it will be vastly expanded. It will be bad enough if owners of PIIGS securities dump them on the ECB and take the money off to Basle to be changed, at a subsidized rate for Swissy. It will be worse yet if the sellers keep having their ammunition replenished, thanks to the manner in which the SNB disposes of its newly acquired euros, and so this descends into the farce of what Fritz Machlup described as the act of a particularly stupid magician, who is no less surprised than his audience that he keeps pulling the same rabbits out his hat which he himself had earlier put there.

Oh, for a specie standard to keep both buyers and seller honest, in place of the limitless pools of fiat money which are at the disposal of our masters!

Even more incredible is the idea that all this is somehow justified because there have been some minor declines in goods prices in this most expensive, most highly cartelized of enclaves— reductions effected partly in response to public outrage at those same prices’ cynical ’stickiness’ and partly due to fears of business being lost to cross‐ border shopping trips to the Alpine confederation’s cluster of less affluent and hence cheaper neighbours.

To the powers‐that‐be, this constituted a case of ‘deflation’ and, by implication, threatened a vicious circle of impoverishment which, left unchecked, might have sucked the beating heart out of the economy and which therefore justified any and all measures taken to ward off this incipient evil, no matter how arbitrary or ill‐conceived they were.

Did no‐one stop to think that a little re‐adjustment might be useful in a land where a Big Mac cost—at the franc’s brief peak—125% more than it did in its home territory, or where—even in the least pretentious establishments—beer was selling for at least double the UK price?

Yes, the rush to find a safe haven has indeed been tough on those trying to do business in Switzerland—especially those contributing to a tally of exports which amounts to an astonishing 60% of the country’s GDP.

But what this simplistic approach overlooks is that imports to this resource poor, mountainous land account for almost 50% of that selfsame GDP—and hence for around three‐quarters of the export bill. Given that these imports are generally of a more price‐elastic, less‐specialized nature—in marked contrast to the high‐end, far less substitutable nature of many of its exports—the scope for a windfall gain here should have been evident, if only the indefensibly crass system of single‐source, authorized import dealers and drastically‐hindered grey markets for consumables and components were abolished forthwith and their prices set free to fall..

Thus, had the rise in the currency been allowed to reduce the cost of staples, there would have been an immediate boost to the purchasing power of a wage packet—freeing up monies to be spent or invested elsewhere (in cost‐cutting innovations, for example!).

Instead, the good Swiss burger, having been relieved to see the cost of filling up his petrol tank fall briefly to a six‐year low, has had to stand by as the political elite congratulate themselves on sending it soaring 40% higher again in the space of less than five weeks.

Had prices been allowed to fall—a state of affairs which can in no way constitute a ’deflation’ unless the drop was being caused either by an outright shrinkage in the supply of money or by a partial abeyance in that money’s use for the purposes of exchange, there would have been a major reinforcement of the means for achieving that flexibility in labour costs which was already voluntarily being explored between workers and management at any number of firms, as well as between firms and the federal and cantonal governments.

A franc fort‐delivered lowering of the overall cost of living would have made the scope for this all the greater, as well as much more equitable in that the pressures for adjustment to working conditions would have been the least where profit margins were at their greatest, rather than it being imposed as a transfer tax on all employees—which is what the devaluation comprises—irrespective of their individual circumstances.

But, no ‐ in place of such an unlocking—an Auflockerung—of rigidities and a removal of barriers to change, it was deemed far easier to issue a heavy‐handed, top‐down diktat, with scant regard to the potentially malign consequences which may yet occasion more suffering than it relieves.

Bound to the Tail of Folly’s Uncurbed Steed

In this, the Swiss are not unique, of course, for such has been the whole sorry saga of the struggle to shake off the toxic legacy of the Boom years. Between the Führeprinzip School of modern populist government and the crude macro pigeonholing of mainstream economics, there are few who are willing to undertake a sufficiently profound rethinking of the problem. Far easier simply to blame a lack of commitment to the existing strategy and to seek to reinforce failure on an ever more massive scale.

In order to reveal the deceit for what it is, let us apply the classic macro‐aggregate approach to the US.

There, we are told, there was no choice but for the government to expand its indebtedness, once the private sector had decided, or was forced, to start shrinking its own. However, the belated recognition has dawned that this has only seeded its own crop of problems. Accordingly, there are those who now wish to rein in Leviathan a little ‐ though the merest suggestion that this might be at all desirable has already seen some of the commentariat foaming that the Tea Party wishes to ‘abolish the 20th century’. (Come to think of it, unwinding much of that epoch’s murderous collectivism in favour of little 19th century Manchester liberalism is not the most repulsive prospect we could contemplate).

Ergo, driven forward by the inexorable muddle of solid algebra harnessed in the service of insupportable presumptions, if no‐one at home wants to ‘dissave’, then foreigners must step into the breach, particularly those foreigners self‐centred enough to run habitual current account surpluses. If they will not do this willingly – by initiating an unsustainable debt bubble of their own, for example – then we must force them to do so by driving down the value of our currency vis‐à‐vis that of theirs.

Hence, a more expansive Fed and a weaker dollar is a boon, not just to America, but to the world at large, given that global happiness is deemed inconsistent with the continued economic lassitude of its hegemon.

Yet none of this ‘analysis’ – of the kind so beloved of the FT’s inveterate One‐World Keynesian, Martin Wolf – stands up to even the most cursory examination.

Take the ‘household sector’ for starters (and ignore any misgivings arising from the knowledge that this grouping is a residual statistical fiction contrived to balance the books after all the estimates regarding other ‘sectors’ have first been added together).

‘If households won’t borrow, someone else has to,’ it is routinely said. Yet, by the count made last in March, US ‘households’, were responsible for an estimated $13.9 trillion in financial liabilities, but simultaneously disposed of $48.8 trillion in financial assets, of which an almost offsetting $12.1 trillion were in the form of deposits and credit market instruments. Presumably, then, not all households are identical in their composition, nor in equally parlous a financial state.

Given this, why can’t we hope that some of the better set ‘households’ might start to lend to others, or – more accurately – that some ‘households’ might dissave more than they have been used to doing while others save a few extra bucks (a process which can benignly reduce overall commitments by having creditors take delivery of goods and services from their erstwhile debtors in discharge of their obligations)?

Similarly, take the non‐financial business sector. ‘Who is to borrow and spend if they do not?’ we are asked. Yet, here too, we find aggregate financial liabilities reckoned at $18.8 trillion set against financial assets of $17.7 trillion. Do we really suppose that the sterile homogeneity of the macroeconomists’ blinkered world vision is so binding in reality that the cash rich ABC, Inc. can not find the means to conduct some business with the rather more extended XYZ, LLC somewhere within such broad limits, if only conditions are right?

The next extension of this council of despair (and this implicit invective against ‘austerity’) is the canard that ‘We cannot all export our way out of trouble!’

Yet this is precisely what we each do, everyday of our lives! This is what the division of labour is all about! This is why the free market is a mutual enriching institution. I ‘export’ the most saleable and remunerative of my skills and with the proceeds, I buy your ‘export’ of yours. In this way, we mutually benefit from an exchange which lifts us both out of the dirt‐grubbing poverty of individual autarky.

To reinforce the point, let us attack it from the opposite angle. America, according to the macro prescription, will only recover if people from Jersey start to sell more to those from Germany, if the Vermonter exports more to the Vietnamese, even if that means cheapening their currency (and, hence the value of their capital and labour) to do it.

Yet the USA is a polity comprised of 300‐odd million of the richest people on a planet which today enjoys more material provision than at any time in its entire history. Why are we so filled with doom that we cannot believe to imagine that there exist almost boundless, unexploited opportunities to enhance the mutual generation of wealth within its borders, as well as across them?

Are we so hooked on the melancholy of underconsumptionism and so in thrall to the century old trope of the ‘closure of the frontier’ that we suppose the Texan can sell nothing more or nothing new to the Tennessean? Or the man from the Bronx to the one from Brooklyn? Or the resident of 52nd Street to the man from 53rd? Or the man from No. 22 to his neighbour at No. 23?

To the Fool King belongs the World

Is there really any need to bilk one’s foreign creditors to get the wheels turning again? Why can we not expedite a resolution of the legacy of claims left over from the Bust ‐ where these are evidently unable to be fulfilled according to their original terms ‐ then legislate to employ all means to lower the cost of doing business, to reinvigorate the profit motive, to protect returns to capital and to lessen disincentives to labour?

The main reason is that such a programme requires too much political courage and an unattainable degree of genuine economic understanding. It implies that control will have to be relinquished by the centre – and hence that all pretence at taking credit for the efforts of others must be foregone, come vote‐winning time. It presupposes a patient appreciation for the untrumpeted, yet steady accumulation of small, yet significant results which is completely alien to those strapped to the whirling treadmill of election campaigning.

Yet, as we have argued all along, the healing which we are all so ardent to complete can be nothing other than a bottom‐up process of discovery and evolutionary adaptation to a drastically changed economic environment.

If the fall of Lehman and the collapse of AIG was the Alvarez asteroid event which threatened to wipe out the debt‐devouring dinosaurs of the previous cycle, nothing we attempted in its aftermath should have been such as to act to hinder the proliferation and diversification of the smaller, fleeter, less susceptible mammalian survivors as they began to fill the ecological niches vacated by the dying Saurians.

Nothing—repeat: nothing—should have been done to try to keep the lizards alive, much less to reinforce their dominance, as has happened in all too many instances of corporate welfarism and crony oligarchism around the world.

The solutions to our present impasse will not then be found in a new round of Five‐Year Plans, much less in the current vogue for policymaking on the fly, for government by headline. Recovery will require hard graft and quick thinking at the most local of levels. It will require intelligent entrepreneurship and a keen eye for opportunity to be exercised from the ground up, rebuilding prosperity one job and one company at a time.

It is our fervent contention that there is nothing within the remit of the politicians and power‐ brokers which is more conducive to this process of regeneration than the rapid introduction into the then‐unchanging rules of the game of as much clarity of form and consistency of application as can possibly be mustered with, in all cases, the fostering of individual initiative the informing principle behind the formulation of those rules. Conversely, there is nothing better guaranteed to prolong and even to aggravate our woes than to hew to the present poisonous mix of stolid denialism coupled with hyperactive interventionism.

Not that there is any evidence that he ever actually said it (since Hoover merely attributed thoughts of that form to his then‐deceased colleague in his later, self‐exculpatory memoirs), but we could do a lot worse than revisit the oft‐quoted (and usually derided) words of one‐time Treasury Secretary Andrew Mellon:‐

…liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate…when people get an inflationary brainstorm, the only way to get it out of their blood is to let it collapse… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people…

For all the unpalatable good sense in that advice, what we have attempted ever since the accursed decade of the 1930s is the converse policy, the one which turns sharp cyclical reversals into debilitating and persistent recessions; which foments social revolution; and which vilifies the honest businessman as much as the hapless banker. What we have come to do, as matter of faith, is to apply an ever more twisted ingenuity in the attempt to:‐

…liquefy labour, liquefy stocks, liquefy farmers, liquefy real estate…when people get an inflationary brainstorm, the only way to get it off their books is to prevent its collapse… to preserve the rottenness in the system. High costs of living and high living must not be allowed to come down. People will have to spend harder and hang the moral life. Values will be arbitrarily adjusted from on high lest enterprising people pick up from less competent people…

We leave it to the reader to judge which is likely to produce the better results.