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Friday, November 28, 2008

GOING INTO THE WOODS, TODAY

I have stumbled upon what may be the secret pattern to world events. It rests upon three pillars of wisdom, and they have nothing in common with the seven pillars elucidated by T.E. Lawrence (of Arabia). The have to do with a Tin Pan Alley song writer, and a ski resort in New England, and a disgraced American politician. I’ll prove it to you.
I would say that Jimmy Kennedy was a lyrical genius. Thank God he turned down that job offer from the English Foreign Service in Nigeria. Otherwise we would have been cheated out of such evocative lyrics as, “South of the bor-der, down Mexico way. That’s where I fell in love when the stars came out to play. And now as I wander, my thoughts ever stray, south of the bor-der, down Mexico way”. He wrote that, in classic Tin Pan Alley fashion, after seeing a post card of Tijuana.
And then there was his magical, “You put your left hand in, you take your left hand out, you put your left hand in and you shake it all about.” Yea, he was a genius, alright.Jimmy was an Irishman, and so English –English was a second language to him, which may help explain his lyrics for “Every gal in Cons-tan-tinople, lives in Istanbul, not Con-stan-tinople, so if you've got a date in Cons-tan-tinople, she'll be waiting in Istanbul.” (The name was officially changed in 1930, at the behest of the Turkish Post Office.)
But my favorite Jimmy Kennedy lyric remains the vaguely ominous drumbeat of “If you go down to the woods today you’re sure of a big surprise. If you go down to the woods today you better go in disguise. For every bear that ever there was will gather there for certain because today’s the day the teddy bears have their pi-cnic.”I have a long held the image of the “Teddy Bears Picnic” being sung by that looming giant of economists, John Maynard Keynes. Can’t you just hear him croaking in his perfectly correct Eton English? “If you go down to the woods today you better not go alone. It’s lovely down in the woods today, but safer to stay at home.” I can.
And by woods, I mean "Bretton Woods", the New England ski resort invaded in June-July of 1944 by 730 of the best economic brains in the world, of which Keynes was the very best. The American economists were the bears and they were there to picnic upon the corpse of the British Empire, and John Maynard Keynes had the unenviable (for an Englishman) assignment to acting as the maƮtre d'. Would you like to know what kind of an economist Keynes was? He was married to a ballarina, that's what kind of an economist he was. He was attracted to drama. Interesting, for a student of "the dismal science" of economics.
Amongst the things settled at Bretton Woods was how to structure the world’s economy after World War II. It was clear to everyone that the lead would have to be taken by the United States, because we were the only nation that ended the war with more gold than we had started with. It’s the golden rule; he who has the gold makes the rules. But it just seemed less tacky that the idea would be put forward by a Brit rather than by an American. So the Bretton Woods accords, presided over by Keynes, tied all of the world’s monetary systems (the pound, the franc, the yen) to the American dollar, because each and every ounce of gold in America’s vaults was officially represented by 35 dollars . And nobody else in the world could make that claim. Then.But things change over time, and eventually we Americans tried to pay for our “Great Society” and the Vietnam War, both at the same time, and both without raising taxes. You know what? You can’t do that, no matter how many voters may want to believe that you can, you can’t, as George Bush Jr. could now explain if he had two neurons worth of introspection .
Newly elected President Richard Nixon tried to close the budget deficit by shutting down many of the anti-poverty programs started by the Democrats. But those programs were far too small a fraction of the Federal budget to stop the bleeding of dollars. A Massachusetts Institute of Technology study done in 1971 calculated the real cost of the Vietnam War (in 1971 dollars) was then about $750 billion, equal to the Wall Street bailout thirty-five years later that caused all the conservatives to flinch.(“Vietnam; Past and Present” by D.R. SarDeasai).
The obvious pressure in 1969 when he took office was for Nixon to increase taxes to pay for the war. But that would have made the war even more unpopular than it already was. And having been elected on his pledge to end the war “with honor”, Nixon didn’t yet have a way out of the war, and he was not willing to be a one term president. So he continued the war, and he did not raise taxes.The immediate effect was that the U.S. was plagued by both inflation and a stagnant economy, called “Stagflation”. Wages were stuck. The nation was losing jobs because the Federal deficits were gobbling up all the available dollars. Businesses couldn’t borrow, so they were shutting down. And, as I recall, that was when hamburger jumped from 35 cents a pound to something closer to a $1.25 a pound. It is not the same situation we face today, but at the time it was an untenable situation. But “Tricky Dick” eventually found a way to make it "tenable". He took America off the gold standard.In the stroke of a pen the dollar was no longer backed by gold. That’s when the treasury stopped issuing real dollars and started issuing “silver certificates”. Read your dollar sometime. With out the limit of gold reserves on the treasury, the printing presses were free to work overtime, and suddenly you could print enough money to afford any war you wanted for however long you wanted.
In 1971 thirty-five dollars could buy an ounce of gold, by November of 2008 it would take $816.40 to buy that same ounce of gold. That is what you call inflation. In 1971 the minimum wage, which is a “lagging indicator of inflation” was $1.60 an hour. By 1981 was $2.50 an hour. It had doubled in ten years. Ten years later it was at $3.80 an hour.This period also saw the introduction of the computer into the general economy, so a great deal of new wealth was also being created. But that only masked the growing instability of the new monetary system Nixon had placed us on. Economists call it “Floating Currency” but I call it the “Trust Economy”. There is no longer any gold behind your dollar, and, really, there is no silver, either. You trust that your dollar will provide you with goods and services of value.I don’t blame Nixon for our current mess. Politicians are not hired to create perfect systems, just systems that can function for the time being. But what the sub-prime mortgage fiasco has proven, and the dot-com bubble proved before that, and the Savings & Loan debacle proved before that, is that without regulation there can be no trust. To quote Ronald Regan; “Trust and verify.” And to quote French President Sarkozy, “We must rethink the financial system from scratch, as at Bretton Woods”. And this time we (the United States) ain’t got the gold, so we ain’t making the rules. Those days are past. Or as Jimmy Kennedy put it, “No, you can't go back to Con-stan-tinople, been a long time gone, Con-stan-tinople, Why did Con-tan-tinople get the works? That’s nobody's business but the Turks.” Words of wisdom to ponder as we enter the woods again.
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