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FACING DOWN THE RULERS OF WALL STREET A HUNDRED YEARS AGO. THEY ARE BACK.

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Friday, December 10, 2010

INTO THE WOODS

I would call Jimmy Kennedy a lyrical genius. Thank God he turned down a 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”. Jimmy wrote that, in classic Tin Pan Alley fashion, after seeing a post card of Tijuana.
Jimmy was an Irishman, and so 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 Mr. 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 act as the America's maƮtre d'.
Would you like to know what kind of an economist Keynes was? He was married to a ballarina (above), that's what kind of an economist he was. He was attracted to drama, which was unusuaul 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 in post WWII. But all things change over time, and eventually we Americans were feeling so rich and all powerful that we tried to pay for our “Great Society” and our 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.
Newly elected President Richard Nixon tried to close the budget deficit Johnson created 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 about $750 billion, equal to the first Wall Street bailout thirty-five years later which caused all fiscal conservatives to flinch.(“Vietnam; Past and Present” by D.R. SarDeasai).
The pressure by 1970 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. Nixon didn't yet have a way to meet his pledge of ending the war “with honor”, so he continued the war, and he did not raise taxes. Instead he borrowed to pay for the war. Businesses couldn’t expand because the government had sucked up all the credit. Wages were stuck while prices inflated. 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 was an untenable situation. But “Tricky Dick” eventually found a way to make it "tenable".
Nixon 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 we could afford any war we wanted, and all the oil we wanted. Economists call the economy Nixon placed us on a “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. But trust depends upon the bankers and the investors and the politicians being worthy of that trust.
I don’t blame Nixon for our economic mess. Politicians are not hired to create perfect systems, just systems that 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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