Thursday, 13 November 2008

I'm Sure There's Nothing To Worry About...

Gentlemen! More appalling cynicism about this mighty nation of ours has been brought to my attention!

Surely it is time for every right-thinking Englishman to petition the Government to outlaw this 'interweb' thing, as it is clearly responsible for spreading dangerous seditious nonsense, such as the following outpourings from someone who freely confesses that he has no formal training as an economist

I have, for a long time, been pointing out that the UK is structurally bankrupt. Back in July I wrote the following:

As I have mentioned, government will need to either borrow more, which will destroy confidence in the UK economy, or will require massive cuts in state spending. If it is the former, then the result will be destruction of confidence in the UK government's ability to manage the finances of the UK and the UK economy. If it is the latter, then there will be a strong downward lever on the economy (at least in the short to medium term).

I have been giving this some thought, and I am coming to a conclusion that it is going to become increasingly difficult for the government to borrow at all. I have detailed elsewhere that the £GB will continue to fall in value. I have argued that depression is looming. The government deficit it going to balloon. This makes lending to the UK government a very, very high risk venture.

My question is this; Will anyone want to continue to lend to the UK government under such circumstances?

I think that the answer, in the coming months, will be 'no'. I am not sure at what point this will occur, but I would guess that the turning point will come in the next six months or so. It is at this point that the government will really fall to pieces. The reason will be that, in the near future, the UK will be calling on the International Monetary Fund. Quite simply, with the huge risks in the UK economy, I simply do not believe that it is creditworthy, and others are going to come to the same conclusion.

As a note, since that post, I have pointed out that the IMF may not be an option, on the basis of the question; who will be funding the IMF?

As the government sought to 'fix' the crisis through the banking bailout, and then chose to spend its way out of recession, it became ever more apparent that the overseas investors, who have been financing the defecit, would gag on such proligacy. I explained the nature of the problem in a previous post at the start of September, and will also quote this at some length:

The reason why confidence is so important is best explained through an analogy. The analogy is an 18th century aristocrat who is living beyond his means. He gambles, he entertains, and he has a wonderful time. All of the tradesmen extend to him long lines of credit, and he continues with his profligate lifestyle, all the time feeling that he is above the petty business of managing finance. After all, his family has been wealthy for generations, and it is his right to enjoy the good life. However, he is actually spending his family wealth, and the earnings from his estate are no longer covering the costs.

His creditors also know that his family have a long history of wealth, they see his fine house, they see his expensive furniture, his lavish lifestyle, and can not believe that he will not repay the credit that they are extending.

Then a rumour starts that he is in financial trouble. One or two of his creditors start to press for payment, and restrict his access to new credit. He is unable to make the payments. The word starts to go around that maybe he is not as solid a credit risk as everyone first thought. Creditors start to refuse to extend his credit further, and the aristocrat starts to realise that he has no money. The entertaining, the lavish clothes, all become beyond his means. He can no longer make repayments. His estate does not generate enough cash, and now that the credit has stopped, he can no longer afford anything at all. He is bankrupt.

The UK has long lived on such confidence but, like the aristocrat, it is a misplaced confidence. It is a confidence built upon an idea that wealth is a birthright. However, as the UK is about to learn, it is not a birthright, but something that requires effort and energy. You can only live so long on your inherited wealth before it is squandered away, and you can only live so long on credit before the creditors start to ask questions of your ability to make payments.

Don't let yourselves be fooled by the fact that most of things that he predicted, at the start of the summer, have actually come true.

The man is quite clearly deluded, and determined to bring this great nation of ours to its knees, with his poisonous drivel.

I don't need to tell you to avoid his blog, which is here, at all costs.

I know you won't let me down.

Sunday, 9 November 2008

That Sinking Feeling

Around the Club, there has been little talk of The Crunch. Because of the Club ethos, no-one will admit to personal loss from market speculation. But last week, HM the Queen, until the previous week the wealthiest woman in Europe, set tongues a-wagging by asking, How could this happen? She herself had lost around £25 million - money she was going to use to fix up the Palace bedrooms one day. Why did no-one say anything, asked the dear lady - warn the others of the fact the Crunch had been predicted? The answer she was given is that each was relying on the others to provide such warnings. It’s part of a system of delegated and distributed responsibility that was set up in the wake of the South Sea Bubble scandal, when government set up the so-called Sinking Fund to ensure future stability and manage the national debt.
... It was indeed for that very reason, the management of national debt, that the government of the day were drawn into the Bubble. The South Sea Company was really a bank masquerading as a stock company, set up in 1711 by Harley, the Earl of Oxford, who was the Lord Treasurer and prime minister in the new Tory government, to underwrite a national debt which had grown to £30 million since the Act of Union, when Scotland’s debts had been added. An Act of Parliament awarded the South Sea Company a trade monopoly with South America, in exchange for a £7 million loan.

The official prospect presented to investors, of lucrative trading rights to Spanish slave colonies in South America (over which in reality England had no control), was a shell game talked up by insiders to lure the greedy. It was so successful that even servants began investing, borrowing money to finance the share purchase, and as the share price rose, acquiring luxury goods such as fine carriages and livery. Others sunk their entire family fortunes into the scheme. Nearly a hundred other “joint stock” companies started up, some with even less realistic aims – to buy up the Irish Bogs, manufacture square cannon balls, and so on. Speculators included the Royal family, and King George I outlawed brokers selling shares in rival offerings.
Inevitably, what goes up on the market must come down, but even the discoverer of the Law Of Gravity, Sir Isaac Newton, didn’t see that coming, and reportedly lost £20,000. He later explained 'that he could not calculate the madness of people'. “The Madness of Crowds” would become a popular phrase to explain such collective delusions. MP Robert Walpole decried "the dangerous practice of stockjobbing’ which would decoy the unwary to their ruin, ‘for a prospect of imaginary wealth.’

The dangers of jobbing stock salesman manipulating the market had already been demonstrated across the Channel the previous century, when Holland had been caught up in buying and selling shares in tulip growing enterprises. The facts that it took 7 years to grow a prize tulip from seed, and that supply soon outstripped demand, did not halt the tulip bulb futures trading mania until the price of a tulip had reached 5,000 guilders. But the Dutch economy survived the bursting of the Tulip Bulb bubble because the Amsterdam Stock Exchange had declined to trade in tulip futures. Walpole also warned the Company directors would become masters of the government, controlling the legislative process.
His warning was in vain, for over 460 MPs and 112 Peers invested. The main private backer, Blunt, Chairman of the Sword Blade Company (which had diversified into official managing forfeited estates), also publicly spoke out against greed and corruption. But behind the scenes he set up a £1 million fund to convert government debt into company stock and drive up share prices, plus a slush fund of £500,000 to bribe government officials. (He was elevated to the Lords within the month.)
European and American interests were also involved, with a Scotsman pulling the strings. Scotland had been forced to subjugate itself to England under the Act Of Union 1707 due to its facing bankruptcy over the Darien Scheme. Promoted by the Scots co-founder of the Bank Of England, the scheme had been backed by the new Bank Of Scotland, which invested a fifth of the nation’s fortune. It was meant to open up trade with China and Japan by setting up a colony on the isthmus of Panama, where a canal would be dug.

The idea was ships from China and Japan would arrive on the Pacific side to trade, offering finest Cathay silks, etc. in exchange for Scots staples. In the event, there were no ships from Cathay and the colonists couldn’t even interest the local Indians in their baubles and bibles. Though guided by a former castaway (a surgeon on one of Dampier’s vessels who had been marooned for 4 years among the local Indians on the isthmus), the colonists were largely young aristocrats with unrealistic expectations. All their ships but one sank, and over 2,000 colonists perished on land. Scotland had to petition England to pay off its national debt to stabilise their paper currency.
The Isthmus of Panama at the time of the Darien SchemeA Scots economist, the so-called “father of finance,” John Law, set up a similar French operation, the Mississippi Scheme. Law was a Scots banker who helped broker the 1707 Act Of Union bail-out, but had fled to France after escaping prison following a duel over a woman. He was the exponent of two economic theories, 'The Scarcity Theory Of Value', and the 'Real Bills Doctrine'. He is credited with the notion each country should have a national bank which could issue its own paper money.
He proposed what he termed a Land bank (which wits of the time called a Sand Bank, suggesting it would sink the ship of state), whereby currency was issued according to crown land-holdings, rather than gold and silver hoards. This appealed to a nearly-bankrupt France, which had exhausted most of its coinage in a series of wars, and Law was appointed Controller-General of Finance by the French regent. Law and his brother set up Law & Co, a bank in all but name, which was awarded exclusive trading rights to the French colonies in the Indies.
To expand this empire, Law set up the Mississippi Scheme to exploit a trading monopoly with the French interests in the Mississippi basin lands. Inspired by the tales of Conquistador gold, the Mississippi stock offer was at first a runaway success. Law and associates talked up the colonies’s potential wealth, leading to massive speculation. Shares rose to over 10,000 livres apiece, and became almost a negotiable currency in themselves. To maintain public confidence, an army of over five thousand beggars was conscripted, equipped with miners’ picks and shovels and marched through the Paris streets towards the ports, supposedly bound for the gold mines of Louisiana – though it was observed most just sold their gear in taverns and returned to begging.
In 1720 Law’s scheme, like all pyramid schemes, became over-inflated. The company was re-organised as the Banque Royale, a mechanism to ease the French exchequer by issuing its own currency. But the Regent could not grasp why he should not keep on issuing paper notes far beyond any tangible assets. To prevent a run on the bank, he had to pass laws to stop people trying to cash in their paper notes for coins. It became illegal to own more than a modest amount of coin, jewellery, precious stones, or even plate, and bounties were paid for servants to turn in their masters for hoarding. Anyone suspected had their homes raided and their assets seized, even for being seen with a single louis d'or coin. Everyday trade collapsed as there was no coin for small purchases. Those with assets remaining who tried to flee were arrested at the border, stripped of any coin or plate, and imprisoned as speculators. Anyone who did escape abroad was sentenced to death in absentia.
Law’s carriage was stoned by the mob, and he fled to England while his brother was put in the Bastille for malversation. (Law would end his life in exile in Venice, where he squandered his personal fortune on his lifelong addiction, gambling, dying impoverished.) The Regent’s attempt to blame Law for his own recklessness did not solve the matter, and many others were charged by a commission of enquiry with malversation. The inflated paper currency was publicly burned, and the Paris treasury issued a new paper currency of modest denomination which was redeemable against gold, silver, or copper coin, leading to a crush in which 15 people died trapped in the bank doors.
The initial success of Law’s scheme had helped inspire England’s Bubble, but the French collapse did not prompt English official action at home. In mid-1720, South Sea Company stocks began to slide from their peak price of £1000 a share. The Sword Blade Company, who acted as chief cashiers of the Company, stopped paying out, and it became known that Sir John Blunt and others had sold out. Other bankers also closed up shop. The ruin of thousands of people followed, beginning with the working class speculators who had bought on credit. Middle-class investors were next, their life savings gone in a week.

Finally even the wealthy suffered, from bankers to bishops. Angry crowds gathered at Westminster, till the Riot Act was proclaimed. The King, George I, lost over £50,000, and his German mistresses, a Countess and a Duchess who had promoted the scheme, were booed in public. There were suicides almost daily as financial ruin spread throughout the country. The Bank of England was called upon to help by subscribing to company bonds, but declined. The South Sea Bubble had burst.
Company directors were spat at in the street and threatened. The treasurer fled in disguise to Calais, and an extradition warrant was issued for his person, but he escaped Belgian custody. A parliamentary ‘Committee of Secrecy’ was formed to investigate, and informed the House they had “discovered a train of the deepest villany and fraud that Hell had ever contrived to ruin a nation.” The Commons ordered the doors locked, and 5 MPs were placed in the custody of Black Rod, including Sir John Blunt. Blunt testified that he couldn’t remember details.

An Act was passed to prevent directors fleeing or sending assets abroad, and to seize the papers of what Tatler co-founder Sir Richard Steele called these "cyphering cits", whose arrogance led to their downfall. The Committee of Secrecy reported the company books, where they were not entirely missing, had pages torn out, contained many fictitious entries, blanks and erasures.
All the directors were arrested and their estates seized to finance a compensatory fund. Blunt alone had £178,000 seized. The Chancellor of the Exchequer was impeached for corruption and put in the Tower for a time. The Secretary of State died after bursting a blood vessel in the Lords defending himself against corruption charges. The Postmaster General died suddenly, poison being suspected. The official Parliamentary History concluded that the Company had amazed all Europe, "but whose foundation, being fraud, illusion, credulity, and infatuation, fell to the ground as soon as the artful management of its directors was discovered."
Walpole, the new Chancellor, divided assignment of the debt between the Bank of England, the Treasury, and the South Sea Company (now effectively nationalised), along with something aptly known as the Sinking Fund. This was a reserve of savings out of the annual Budget to stabilize the currency. Legislation then had to be passed (by Pitt) to stop successive Ministers raiding the fund, and it was decades before The South Sea Company and the Sinking Fund could be safely abandoned, for other economic crises continued to appear, as part of the natural boom-and-bust cycle of capital investment.
... Today of course, things are quite different. Money can be moved electronically, added or subtracted in an instant, with no need for coins or even paper. Plastic is the new gold standard. Collateral such as real estate can be re-mortgaged, the debts repackaged, sold and re-sold abroad. To maintain confidence in the stock market, the Chancellor will quickly intervene to save any bank that gets itself into a mess through mismanagement, no matter how huge the public cost and scandal. The Prevention Of Terrorism Act can be used to seize foreign assets, where there is a perceived danger to British interests.

As to the lessons of the past, many would conclude there is nothing to be learned – or rather, nothing that will be learned.

Friday, 7 November 2008

Who Could Have Known....

I was chatting to Manton the other day over a drink, and I said something about how it was a pity that no one could have forseen the collapse in the markets, because if they had, something could have been done to avoid the worst effects of the crash.

He astonished me by pointing out that there were some that had predicted it. He drew my attention to the following article:

Ten People Who Predicted the Financial Meltdown

Of course, as I don't need to tell you, it is troublemakers like these that are actually responsible for talking us into a recession, and that if only they would keep their mouths shut, everything would be fine.

I am relying on you to ensure that their poisonous, seditious nonsense goes no further. Under no circumstances should you allow others to be exposed to such negative thinking.

I know you won't let me down.

Saturday, 1 November 2008

In The Heart Of The World

We were sitting around the fire in the club lounge the other evening, and the talk turned, inevitably, to exploring, in particular what we used to call the Mysterious East. It has a special appeal for many even today, when the maps have no more blank spaces. For its ancient ways offer a counterpoint to Western capitalism and materialism which is particular appealing when these Western philosophies are shown to be hollow and manipulative in times of economic crisis. In the old days, when Asia’s vast mountainous interior was largely unexplored, its mystery, its lure, stirred many to go off exploring, excited at the prospect of discovering who knows what – Shangri-La, or perhaps the Abominable Snowman. A few were simply drawn to its mysteries like moths to a flame, for reasons they themselves could scarcely articulate, and often either never returned, or returned forever changed.
One of these was a British explorer who came to be called by his biographer “the last great imperial adventurer”. His brash early geographic explorations through the heart of Asia led to him later exploring his own heart for the lessons that might be learned from the ancient wisdom of the East.
Although born in India, he was packed off back to England to be raised by two religious aunts. After attending Clifton College in Bristol, Francis Younghusband joined the Army for the same reason many did at that time – the opportunity for adventure abroad. Inspired by his uncle, a noted explorer of Central Asia, Younghusband became in 1886-7 the first European since Marco Polo to cross China and Asia. The young subaltern travelled through Manchuria to Peking and into Mongolia, crossing the Gobi Desert and the Himalayas to India. For this remarkable feat, the Royal Geographic Society not only gave him a gold medal but elected him as their youngest member, age 24.
Francis Younghusband He transferred to the Political Service and got involved in what Kipling in his novel Kim would call "The Great Game." This was the contest between Britain and Russia for political control over the lands beyond India’s North-West Frontier. After discovering the source of the river after which India is named and nearly having war with Russia break out when he was reported killed, Younghusband was despatched to Tibet at the head of British military mission.
In 1904, his friend Lord Curzon, Viceroy of India, sent him in to show the flag as part of the political Great Game. There in his zeal, Younghusband exceeded his instructions, leading to the massacre of a Tibetan militia army. In the capital Lhasa, he intimidated the Dalai Lama into signing an impromptu anti-Russian alliance treaty with Britain (later repudiated by an embarrassed Whitehall, which was pretending neutrality). But while his men looted the Potala Palace and the monasteries, his own time in Tibet became the turning point of his life. In the mountains he had a spiritual experience, a mystical revelation about the oneness of humanity and religion, which would change his formerly evangelical-Christian outlook into an Oriental mystical one. (In Whitehall parlance, they called this ‘going native.’)
Although invested with the title of Knight Commander for his “conquest” of Tibet, Sir Francis turned from the sword to the pen, becoming a writer and propagandist for his beliefs. Instead of serving the cause of Empire, he felt he would instead serve the cause of humanity’s spiritual development. During the First World War, he sailed to America with Bertrand Russell to lecture in philosophy. He then commissioned the song which would become Britain’s popular “alternative” anthem, Jerusalem, based on Blake’s mystical verse, but refused to let it be used to promote wartime jingoism. (He even thought the Boy Scouts too militaristic.)
After the war, he became President of the Royal Geographic Society, and organised several reconnaissance expeditions following his 1904 Tibet route, this time right across Tiber to the Chinese border to explore Mt Everest, named after a British official, but known more reverently by Tibetans as Chomo-Lungma, the ‘Mother Goddess Of The World.’ It was on one of these expeditions to the “roof of the world” that two famous colleagues of his failed to return, their fates a mystery, when Mallory and Irvine vanished near the summit in 1924. He himself turned to inner exploration, and became a mystic admired by Bertrand Russell and HG Wells. He explored esoteric ideas like telepathy and the existence of superior extraterrestrial life forms, writing a score of books on spiritualist beliefs which anticipated those of the 1960s, with titles like The Heart Of Nature (1921), Mother World (1924), Life In The Stars (1927), and The Living Universe (1933).
In 1936, he attempted to reduce religious differences by establishing the World Congress of Faiths as war clouds again gathered over Europe and Asia. (His former house-maid Gladys Aylward was caught up in this, she having become a missionary in China just before the Japanese invasion, an event depicted in her filmed biography, The Inn Of the 6th Happiness.) The American aviator Lindbergh, an antiwar activist also interested in matters spiritual after the kidnapping and death of his baby, personally flew him across India, whose independence he long supported. But though he admired Gandhi, he was not entirely ascetic. In fact, he also preached free love, criticizing marriage as an outdated custom. Until his death, he lived with Lady Madeline Lees, who with her husband had co-founded a Christian commune at South Lytchett Manor in Dorset. Having forsaken his wife, he spent part of his last few years with his much younger companion at her manor house on the north side of Poole Harbour. He died at the Manor during WW2, of a stroke.
Lytchett Minster churchyardYou can visit his grave in the quiet country churchyard of Lytchett Minster, across the fields from the Manor, next to an ancient yew tree and under a headstone with a carved image of the Dalai Lama’s palace in Lhasa.