Thursday, April 07, 2005

History Repeating Itself...

There are many fascinating Victorian books, the Extraordinary Popular Delusions and the Madness of the Crowds is a must read for anyone wishing to comment about economic and political matters.

Here, in just Chapter One, about John Law, fanatical financier and wicked gambler who invented an early form of derivatives:

(After the death of Louis XIV) Hardly was that monarch laid in his grave ere the popular hatred, suppressed so long, burst forth against his memory. He who, during his life, had been flattered with an excess of adulation, to which history scarcely offers a parallel, was now cursed as a tyrant, a bigot, and a plunderer. His statues were pelted and disfigured; his effigies torn down, amid the execrations of the populace, and his name rendered synonymous with selfishness and oppression. The glory of his arms was forgotten, and nothing was remembered but his reverses, his extravagance, and his cruelty.

The finances of the country were in a state of the utmost disorder. A profuse and corrupt monarch, whose profuseness and corruption were imitated by almost every functionary, from the highest to the lowest grade, had brought France to the verge of ruin. The national debt amounted to 3000 millions of livres, the revenue to 145 millions, and the expenses of government to 142 millions per annum; leaving only three millions to pay the interest upon 3000 millions. The first care of the regent was to discover a remedy for an evil of such magnitude, and a council was early summoned to take the matter into consideration.

The parallels get more intense...

The measures ultimately adopted, though they promised fair, only aggravated the evil. The first, and most dishonest measure, was of no advantage to the state. A recoinage was ordered, by which the currency was depreciated one-fifth; those who took a thousand pieces of gold or silver to the mint received back an amount of coin of the same nominal value, but only four-fifths of the weight of metal. By this contrivance the treasury gained seventy-two millions of livres, and all the commercial operations of the country were disordered. A trifling diminution of the taxes silenced the clamours of the people, and for the slight present advantage the great prospective evil was forgotten.

OK. Now, shall we laugh? Cry? Build a guillotine? Seriously, we are talking here of 1719. This is nearly three hundred long years ago.

Why are we reproducing this episode in history? What is it in humans to cause them to choose a road, a very well travelled road, lined with bones, and then to march resolutely forwards? I have warned America for thirty years now and here we are, in the final stages of a classic disaster such as the one that destroyed the mighty French Empire.

Mackay explains how John Law created a bank that issued paper for monopoly powers granted from the Regent. These papers were then resold in the open stockmarket.

Law found that he lived under a despotic government; but he was not yet aware of the pernicious influence which such a government could exercise upon so delicate a framework as that of credit. He discovered it afterwards to his cost, but in the mean time suffered himself to be impelled by the regent into courses which his own reason must have disapproved. With a weakness most culpable, he lent his aid in inundating the country with paper money, which, based upon no solid foundation, was sure to fall, sooner or later. The extraordinary present fortune dazzled his eyes, and prevented him from seeing the evil day that would burst over his head, when once, from any cause or other, the alarm was sounded.

Despots who dispense with favors and grant interlocking monopolies and cartels are very bad news. Over and over again, after the first flush of easy money, the imperial/despot illusion of wealth collapses under the weight of parasites and corruption and bribery that always are birthed in the hot house of such governance.

More: It was remarked at this time that Paris had never before been so full of objects of elegance and luxury. Statues, pictures, and tapestries were imported in great quantities from foreign countries, and found a ready market. All those pretty trifles in the way of furniture and ornament which the French excel in manufacturing were no longer the exclusive play-things of the aristocracy, but were to be found in abundance in the houses of traders and the middle classes in general. Jewellery of the most costly description was brought to Paris as the most favourable mart; among the rest, the famous diamond, bought by the regent, and called by his name, and which long adorned the crown of France.

Note how, today, the market of upscale property and items is roaring along marvelously. One of a kind things are bid up higher and higher by giddy people made rich on speculation and selling debt instruments. Now for the depressing part of the story:

Thus the system continued to flourish till the commencement of the year 1720. The warnings of the parliament, that too great a creation of paper money would, sooner or later, bring the country to bankruptcy, were disregarded.
Hitherto no difficulty had been experienced by any class in procuring specie for their wants. But this system could not long be carried on without causing a scarcity. The voice of complaint was heard on every side, and inquiries being instituted, the cause was soon discovered. The council debated long on the remedies to be taken, and Law, being called on for his advice, was of opinion, that an edict should be published, depreciating the value of coin five per cent below that of paper. The edict was published accordingly; but, failing of its intended effect, was followed by another, in which the depreciation was increased to ten per cent. The payments of the bank were at the same time restricted to one hundred livres in gold, and ten in silver. All these measures were nugatory to restore confidence in the paper, though the restriction of cash payments within limits so extremely narrow kept up the credit of the Bank.

Notwithstanding every effort to the contrary, the precious metals continued to be conveyed to England and Holland. The little coin that was left in the country was carefully treasured, or hidden until the scarcity became so great, that the operations of trade could no longer be carried on.

The first warning of a coming depression. I often harp about money being lent out for less than the rate of inflation. If I gave you $20 today and you paid me back in a year at only 4% interest, I then go fill my tank with gas with the $20 and get less than a full tank, ie, I lost value while my money was lent out.

Seems simple enough. If you print endless dollars or lend money at ridiculous rates, savings plummets to near zero and the dollars don't buy what they could, earlier. This rule of economics is pretty iron clad. Just because it doesn't set in with a vengence immediately doesn't mean it isn't setting in with a vengence, it merely means the despotic rulers and the gang around him are madly manipulating the currency and the value of the collective estate and the mess is being shoved forwards in time.

This always means bad things will happen. This is how unhappy investors in Paris reacted when everything collapsed:

Eight days afterwards the concourse of people was so tremendous that fifteen persons were squeezed to death at the doors of the bank. The people were so indignant that they took three of the bodies on stretchers before them, and proceeded, to the number of seven or eight thousand, to the gardens of the Palais Royal, that they might shew the regent the misfortunes that he and Law had brought upon the country. Law's coachman, who was sitting on the box of his master's carriage, in the court-yard of the palace, happened to have more zeal than discretion, and, not liking that the mob should abuse his master, he said, loud enough to be overheard by several persons, that they were all blackguards, and deserved to be hanged. The mob immediately set upon him, and, thinking that Law was in the carriage, broke it to pieces. The imprudent coachman narrowly escaped with his life. No further mischief was done; a body of troops making their appearance, the crowd quietly dispersed, after an assurance had been given by the regent that the three bodies they had brought to shew him should be decently buried at his own expense. The parliament was sitting at the time of this uproar, and the president took upon himself to go out and see what was the matter. On his return he informed the councillors, that Law's carriage had been broken by the mob. All the members rose simultaneously, and expressed their joy by a loud shout, while one man, more zealous in his hatred than the rest, exclaimed, And Law himself, is he torn to pieces?"11*

Note here the earlier article I posted about the business in Pakistan--- deployed paramilitary troops and police to guard the country's main stock exchange yesterday following angry protests from brokers and retail investors, who saw the value of their shares plunge more than 24 per cent in a week. Investors have been reassured by Greenspan even as Bush wonders about even bothering to honor the paper IOUs issued in the name of our government vis a vis the citizens who forked over billions to the government to invest. Ho hum, the money is not only lost, we can't repay it, not without taxing the rich and we won't do that so we will cut funds to the workers who gave us these funds. Let them eat cake!

Or as my Victorian granddaddy would say, "If you think you are getting something for nothing, you are being cheated".

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