Author : John E. Charalambakis
Date : December 29, 2013
I boarded the flight from Chicago to London. From the plane’s speakers I could clearly hear Tom Petty’s voice singing his song about “dancing in the zombie zoo”. “How appropriate”, I thought. “It seems that we have a zombie economy which dances around equities’ gains, paper/zombie assets, at a time when out-of-the-box solutions are needed that can revitalize the process of wealth creation which in turn will generate collateral assets.” It is my deep belief that historically when economies face an impasse they need institutional surgery that can stimulate a rebirth. However, like last year’s flight during the same period, I was about to become a witness to a magnificent discussion, and be exposed to marvelous minds like those of my fellow passengers. It was a great opportunity for learning.
King William III of England opened the conversation. He wanted us to comprehend the idea that at very critical junctures in human history what seems to be an internal contradiction (some would even characterized it a civil conflict) has the potential of institutionalizing global changes that alter the course of history. He started arguing that his alliance with the two political parties in England (the Tories and the Whigs) in 1688, not only stopped any further efforts by England to invade his country (Dutch) but also created a new alliance that became the cornerstone of the British Empire. It was he argued an act of creative geopolitical destruction, where by overthrowing the King (James II of England) with the support of parliamentary forces by the Tories and the Whigs, a new alliance was formed by former rivals that would allow in the centuries to come the British ships to dominate the world by controlling the trade routes.
It was time for Edmund Burk to intervene. The man who epitomizes the support of tradition, order, and is considered anything but a revolutionary, wanted to add his voice of support to what King William III was describing and has been known since then as the Glorious Revolution. Edmund Burke wanted us to understand that as a traditionalist he supported that Glorious Revolution not so much for its religious implications (killed the chances that a Catholic King will come to rule England) as for the potential it created. He went on to explain that the revolution was related to the War of the Grand Alliance in mainland Europe, but most importantly set the foundations for parliamentary democracy in Britain, as well as planted the seeds for the birth of the British Empire.
“And don’t forget the Bill of Rights that came a year later” Thomas Paine interjected, “which by itself became the lightning rod for the two subsequent revolutions that shook the world almost one hundred years later”. He was referring of course to the American Revolution of 1776 and the French Revolution of 1789.
The mentioning of the French Revolution made everyone in the group uneasy. We all knew of the legendary conflicts between Edmund Burke and Thomas Paine regarding that issue.
“Is there a war where economic and financial issues are not at the heart of the conflict?” Joseph (son of Jacob and Prince of Egypt) asked. It might have been an attempt to release the tension building up between Burke and Paine.
“Listen” he said. “I was betrayed by my own brothers, who planned to kill me. If it were not for some descendants of Ishmael (a.k.a. Palestinians) to rescue and save me, I would have never become the Prince of Egypt, and if I had not become the Prince of Egypt my nation as well as other nations may not have existed today. Empires and nations come and go because they fail to remember the future” Joseph added, “and consequently they fail to change.”
It was time for William McChesney Martin to intervene. The voice of the legendary chairman of the Fed (second best only to Paul Volcker), was needed at this point of the conversation. He had the benefit of time on his side.
“When we look at history from a helicopter” he said, “then we understand the linear as well as the non-linear truncation and inflection points.” It seems that he wanted to drive the discussion about one hundred and seventy one years before William III’s time and that of the Glorious Revolution. He wanted to remind us of Luther and the nailing of his Theses in the Wittenberg church in 1517. His points were crystal clear. He took us from that moment to the consequences of what happens when a society is liberated from its fears and despots. The restraints that had bound people’s minds for centuries were smashed when those Theses were nailed at the church’s door. William III owed his Glorious Revolution to the Enlightenment era inaugurated in 1517. “The Glorious Revolution of 1688, the Bill of Rights of 1689, the American Revolution of 1776, the French Revolution of 1789, and the Civil War in the US in the early 1860s are the effects of the Enlightenment Era that advanced liberty, knowledge, and equality.”
“The reconstruction period that followed the American Civil War”, Martin continued “gave the opportunity for some intercontinental asset transfers, which in turn allowed the creation of capital and wealth. Naturally, liquidity increased, and the 20th century belonged to the US because whoever controls the assets makes the rules. Exorbitant privilege or not, the reality is that natural liquidity flames growth.”
“That’s right” Edmund Burke echoed, “but the emphasis should be on the word natural.” We all understood his point that the instantiation of unnatural events and policies that have no anchors introduces a corrosive effect on people’s reverence for institutions and traditions. Mob-rule making its case in metaphysical abstractions was the thing that Burke hated. Burke was known for his thesis on equipoise acts that moderate extreme positions, which extreme positions tend to undermine social cohesion. His emphasis on the role of emotions in relationship to rational choices that lead to gradual changes vindicated him and his views regarding the French Revolution.
Joseph was anxious to interject that when nations fail to save survival is at stake. The booms provide opportunities to save for the down times. Moreover, unnatural booms are nothing but opportunities for unnatural savings to be used for unnatural busts. That was his recipe when he was running Egypt. He was trying to make a point for generational imbalances and unfunded liabilities when he was interrupted by Thomas Paine on this very subject.
Paine is a unique character in human history. A close friend of Benjamin Franklin, Thomas Jefferson, George Washington, James Madison, James Monroe and many other legends, had a passion for individual rights and a righteous rage at every violation of them. His pamphlet titled “Common Sense” distinguished legitimate from illegitimate rule. His thesis became the heart of the philosophical argument that the British had no right to command their colonies, including of course the United States. Paine quickly became the voice of the revolution. His “Crisis” writings uplifted the revolutionaries when their spirits were down. “Tyranny, like hell, is not easily conquered, yet we have this consolation with us, that the harder the conflict, the more glorious the triumph. What we obtain too cheap, we esteem too lightly; it is dearness only that gives every thing its value.”
Of course, not many persons – like Paine and General Lafayette – can claim their presence and influence in the two most important events of the 18th century (the American and French Revolutions).
Paine apologized for interrupting Joseph, but he wanted to drive home a very crucial point. He needed to emphasize once again one of the most significant themes included in his 1792 publication titled “The Rights of Man”, that of the obligations of existing generations to the next. Nations and institutions come to a dead-end he said when they fail to account for future generations, and savings – as Joseph had elaborated – are important not just for that purpose but also for alleviating poverty and advancing the cause of justice (the themes in the second part of that book).
The pilot announced that we will be landing in about half an hour. Everyone had lost the sense of time in this marvelous conversation. William McChesney Martin asked for the floor. He felt that we had in just a few hours time successfully reviewed some important events in human history, but his concern was about the future. “Listen” he said, “what do the events of 1517, 1668, 1776, 1789, 1861, 1914, 1934, 1951, and 1971 have in common?”
“In the years preceding the events we discussed the pertinent societies and their economies had come to a dead-end. An impasse had been reached. An institutional revolution was needed. In 1951 as Chairman of the Fed I overcame that impasse by institutionalizing the independence of the Fed. My concern is that despite the pretenses the world is on fire. Japan is destined to be bankrupt in a few years time. China is facing major crises due to the over-extension of credit and the bubbles it has created. Russia suffers from an addiction to high oil prices and has a democratic deficit. The rest of the BRICS suffer from an identity crisis as do most of the emerging economies. The EU has so many issues, especially in its banking sector, that if it were not for the Fed’s swaps they would have called the game over five years ago. As for the US, its unfunded liabilities and the overall derivatives structure undermines its potential. While it seems that no major economic earthquakes are expected in 2014 and possibly 2015, I am very concerned about what comes after that. We need major institutional reforms”.
At that point a flying attendant brought a phone to the chairman. “I am sorry for interrupting” she said, “but Dr. Janet Yellen is calling for the Chairman”.
“Hi, Janet” Martin said. “My advice? How about start limited backing of US reserves with hard assets on the way to a free banking system?”
Happy New Year!