Wednesday, April 17, 2013

The Time is for Turning

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession  (McGraw-Hill, 2009) and "The Coming Collapse of the Municipal Bond Market" (, 2009)

The Economist published a sketch of Margaret Thatcher's political career in its April 8, 2013, edition"No Ordinary Politician" (subscription may be required) is a reminder of how, when there is a great change in store, it is evident to few. So it is with gold.

            When Thatcher was elected head of the Conservative Party in 1975, she may have been grateful the Labour Party was in power. Inflation, the Economist writes, "had reached 25% and people began to hoard food. It was then that Mrs. Thatcher became a Thatcherite. She was led there by [Keith] Joseph, who argued that only a free-market approach would save the country. These policies, extremely daring for 1975, became her agenda for the next 15 years."

            "Extremely daring" is not an exaggeration: "The country shifted significantly to the left during the second world war, leading to a landslide victory for Clement Attlee's Labour Party in 1945. Building on the forced collectivism of the war years, the Attlee government embarked on industrial nationalization and introduced the welfare state. To a generation of politicians scarred by the mass unemployment of the 1930s, full employment became the overriding object of political life."

            Most of the nationalizations long pre-dated the 1970s but the machinery of state tied the country in knots: "[T]o keep employment 'full', successive governments, Labour and Conservative, had to intervene ever more minutely in the economy, from setting wages to dictating prices." The atmosphere in Britain was tense. The unions were militant and frightening. One did not dare test their authority, which was ubiquitous.

            It was obvious the policies of the past 30 years had failed, but no one in politics was willing to address them. From the previous paragraph: "successive governments, Labour and Conservative, had to intervene ever more minutely in the economy...." To prevent the intrusive apparatus of state from unraveling, politicians in both parties intruded all the more.

To set wages and dictate prices was not a great disadvantage in either party since any debate echoed within a very, narrow channel. (As seems always to be the case, at least in recent decades, the two parties, say, Democrats and Republicans, are not really debating anything beyond the brand of mouthwash stocked in the Senate men's room.) The public debate did not wander much beyond these divined parameters since "an urgent return to the values of enterprise and self-help" (from the Economist's description Thatcherism) was - literally - unheard of.

            As opposition leader in the late 1970s, Thatcher "proceeded slowly, appointing her supporters to a few key posts, but otherwise doing little to suggest a radical break with the past. She relied more on the mounting unpopularity of the Labour Party, unable to control the trade unions during the 'winter of discontent' of 1978-79, to win the election of 1979."

            Central bankers today play the part of the Labour Party. They are doing whatever it takes to control us. The absurdities grow. At the Grant's Interest Rate Observer conference on April 9, 2013, Sean Egan spoke. Head of Egan-Jones Rating Company, he predicted European central banks will announce they are transferring sovereign bonds to Special Purpose Vehicles (SPVs). The asset will be the countries' bonds and the liability will be the euros that are whipped into existence at the moment they enter the SPV. The countries will then report their sovereign debt has been reduced from (let's say) $200 billion to $100 billion.

            Sean's forecast was met with skepticism, not, I think, because Lewis Carroll copyrighted it. Instead, the skeptics seemed to believe the scheme would be so self-evidently nonsense that the EU and ECB would lose all credibility. I think the skeptics will (would) be wrong.

Having seen central bankers state and do the incredible for so long, and noting their disregard for the law and plausible finance, an SPV announcement will probably not stir passions.

It is easy to picture: The press conference is held. TV people find pro and con experts who argue whether the SPV is better for stocks or bonds. The print media reports on the front page: "The ECB today announced..." The twelfth paragraph on page 41C: "Harry Hothead from the Lucifer Institute claims the SPV is 'simply a shell game' and 'should be ignored. It does not reduce the debt on national balance sheets by a single euro.'" On his blog, The Krugster will claim "the SPV has the same qualities as the trillion dollar platinum coin I proposed to close the U.S. national debt. It's time to revive that debate." And now, the orbit of central banking and common sense having passed Alpha Centauri 100,000 miles ago, some - maybe not enough, but some - former detractors of the platinum coin will be persuaded the idea is very similar to Europe's SPV, so "let's not dismiss it out of hand." Note the L.N.D.I.O.O.H. ploy followed the bait-and-switch of comparing the coin to Europe. The complete idiocy of the idea has, therefore, been extracted from discussion. The P.R. people will then enlist all the regulars for op-ed duty: repeat and repeat "very similar to Europe's SPV," until that becomes commonly acknowledged. The anatomical process of adapting platinum coins would continue - unless it didn't. There will be a moment when The Emperor Wears No Clothes. If that happened here, the skeptics at the Grant's conference would be correct: this is a step too far.

That's the point we are approaching. Gold is the refuge from the wildly out-of-balance world that central bankers are given credit for bequeathing upon us. Gold, silver, oil, and Johnny Walker Black are money, more awkwardly employed than paper currency, but the thing to hold when The Emperor...etc.

There are cracks and they are growing. Margaret Thatcher's ascendancy shows the opening, then development, of a change in thinking across the country, from roughly 1975 to 1983.

Permitting the Economist speak: "Once in power [in 1979 - FJS]... she revealed her true colours. Government spending was curbed to control the money supply, exchange controls were abolished and the currency was allowed to continue to float (rather than joining the new European Monetary System)-all decisive breaks with post-war orthodoxies. Industrial subsidies were cut, sending many firms to the wall. Against the background of a world recession, the result was a sharp rise in unemployment. By 1981, when joblessness stood at 2.7m, police were battling Molotov-cocktail-throwing protesters on many city streets in Britain.

"This was Mrs. Thatcher's low-water mark. She was, for a time, the most unpopular prime minister on record. Most of her colleagues expected her to retreat, but instead she ploughed on. 'U-turn if you want to, the Lady's not for turning,' she had cried the year before. She sacked all those ministers, the 'wets', who wanted to change course, and stocked her cabinet with ideological fellow-travelers. The 1981 budget contained more spending cuts, further depressing demand, in the teeth of the recession; 364 economists condemned her policies in a letter to the Times. This, more than anything, saw the birth of her reputation for ruthless decisiveness."

Having visited England for the first time in 1981, I can attest that the 364 economists were attempting to freeze the nation into a world only they, with their woefully inadequate imaginations, yellow bellies, pathetic efforts to stiff students with Ouija boards as science, and tenure to contribute less of importance than the Ames, Iowa, roller-derby team, could have found attractive. A hotel room in Mayfair cost the equivalent of $29, but it was cold. Theatre-goers wore old overcoats since there was no heat. There were so many strikes or rumors of strikes over the course of a day one needed a scorecard to keep track. The people looked awful. Was this Moscow? Will they get out of bed tomorrow morning? Why?

Margaret Thatcher is rightly celebrated for "not turning," but her time would not have arrived except for the bunglers who ditched their country to preserve their personal sanctuary. After the people have said "enough" to central banking, there will be such conversations: "Oh, yeah, Ben Bernanke was a terrible man. What did he do, again?"