Mesmerized
The technocrats, bureaucrats or fonctionnaires are
coming. More dark suits, more dark ties and more
dark indifference towards the electorate. Who ever
thought the push to support the Euro would threaten
democracy? What’s the definition of an expert? A guy
from out-of-town with a briefcase. That’s this crowd,
well removed from the real world, but probably very
familiar with le Guide Michelin.
A Canadian friend who lives in central France recently
observed that his six immediate neighbours all wanted
to jettison the Euro and bring back the French Franc.
All six, no exceptions. The rest of Euroland is probably
not that different, but that’s not the message from the
political or bureaucratic elite.
My God, they are all tiresome. They have put a new
twist on the word propaganda. Yes, sir, to devalue
from the Euro, to eliminate all or part of the Euro,
would be a fate worse than death. Why? Because all
the bureaucrats’ bureaucratic friends in Brussels,
Frankfurt and so on would be out of a fat job. Who
would pay their pensions? Who would pay rent on the
palatial Euroland offices?
We heard the same lamentations a decade ago when
Argentina was considering devaluing by cutting the
dollar/peso link. “Oh, no, you can’t do that” cried the
US, the IMF and the big New York banks. “You must
send interest rates to the moon, you must protect the
peso.” But Argentina devalued anyway, repudiated
the debt, and was much the better off for it. Several
years later they settled with the bond holders (at about
30 cents on the dollar?) and life went on.
Throughout the sweep of history individuals,
corporations and countries have hit the wall.
Doubtless they have been criticized, probably with
justification. But at least some of the blame, and often
most of the blame, should be levelled at those wellheeled
managers who (with other people’s money)
bought the bonds, or advanced the credit without doing
a scrap of due diligence on basic matters like asset
coverage and earnings coverage. As we have said
before, if you give a drunk a case of whiskey, what do
you expect? Is there any real difference between the
drunk and a politician in the grip of financiers? Just
how did Greece (and Europe and the US and, and…)
all get themselves into the current mess?
But what is far more unsettling than the bureaucrats’
incessant attempts to put lipstick on a pig is their
blanket refusal to think about, let alone create, a
monetary system to serve mankind in the future.
This lack of system, this lack of discipline, this
lawlessness is why we are in an unprecedented, and
irreparable, global fiasco. The President of the Dallas
Federal Reserve (Mr Richard Fisher) recently noted,
on Canadian business television, that the greenback
was a fiat currency, but he could have noted that all
currencies are fiat currencies these days. No matter,
few in Europe and fewer in America know what fiat
means – perhaps a funny little Italian car?
For well over 2000 years until the 17th century we had
a monetary system that was cumbersome, but it
worked. It was bi-metallic, gold and/or silver. Nothing
else. However, “cumbersome” was an understatement
– it might cost 30% of value to transport a lot of money
from Genoa to Antwerp. Moving chests of gold ducats,
silver pesos and silver taels needed horses, wagons,
guards and a lot of time and travel expenses. Barbary,
English and Dutch pirates made transport by sea a
dubious alternative.
Silver discoveries in Eastern Europe and Japan plus
huge gold and silver discoveries in the New World
lifted the economy out of the Dark Ages (when there
was not much trade at all) and lubricated the
Renaissance. They helped finance expanding trade
(and lots of wars) from the 16th century on. As well,
new tools, instruments and laws (Isaac Newton’s laws
on action and reaction, Boyle’s laws on behaviour of
gasses and many others) all helped boost economic
activity. One law that was enunciated during that
period was Gresham’s Law (bad money drives out
good), a truism that manifested itself with the advent of
Central Banks in the 17th century, and with them the
gold standard. The gold standard enabled a Central
Bank to issue paper notes in proportion to gold held in
the vault. These notes were seen as being as good as
gold and were in fact as good as gold so long as the
bankers didn’t stretch Gresham’s law.

The simplicity and effectiveness of the gold standard
substantially reduced the cost of doing business and
really greased the economy and what became the
Industrial Revolution from the 17th century. It also kept
inflation under control. Sir Isaac Newton was,
interestingly, one of the early Governors of the early
Bank of England.
However, after a two hundred plus year run, the gold
standard pretty well came to an end with WW I, the
first (but not the last) big war to be financed by
borrowing and printing. After the disasters of the
depression and WW II Bretton Woods was created and
lasted a mere 25 years before being destroyed by the
technocrats and the political elite forty years ago. This
delivered us into a monetary wilderness and people
cheered. As stated by the rock group Dire Straits, “Get
your money for nothin’…” It is considered
inconvenient to mention Gresham’s law today because
it’s not just some money that is bad, it’s all money,
trillions upon trillions, that is bad. Mr Fisher spoke the
unspeakable.
The first fiat empire set to fail appears to be Euroland.
Even German bonds are having a rough go –
presumably markets have concluded that Frau Merkel
will ultimately capitulate and print. The technocrats still
dream that investors can be induced into buying more
Sovereign bonds but la la land has changed. Investors
are finally doing their homework and now they don’t
want to hold any of the toxic junk, let alone buy any
more. This presents a bit of a problem since all
governments need to borrow ever increasing quantities
of money to stay afloat.
But the real chaos will start when fear of Sovereign
debt moves across the Atlantic where investors are
sitting on unheard of volumes of paper, none with any
shred of asset value backstopping it, and all placed
when people thought “Well, governments can always
raise taxes to service this stuff.” Sure.
Gresham, or his ghost, could never grasp that matters
could get so far out of hand. Nor can markets, so they
generally sit like rabbits on a road staring mesmerized
at oncoming lights. But there is no sense complaining
– the trick is to ascertain where the disenchanted bond
money, the disenchanted currency positions, will go
and, in our view,

Murray H. Pollitt, P. Eng.