I get all sorts of emails, and this one, from a fairly well known money manager in the UK by the name of Terry Smith, is worth reading in full. It is the text of a letter he has sent to the Financial Times newspaper. The FT is behind a paywall so I reproduce it in full:
From Mr Terry Smith.
Sir, I refer to the debate being conducted in the pages of the Financial Times between those who propose further Keynesian measures, such as Martin Wolf (“Struggling with a great contraction”, August 31), and those who do not accept that they will work, such as Wolfgang Schäuble (“Austerity is the only cure for the eurozone”, September 6).
Such so-called Keynesian measures as advocated by, among others, Ed Balls, Samuel Brittan, Paul Krugman, George Magnus and Barack Obama as well as Mr Wolf have not worked to date, and they will not work. Their advocates seem to assume that their repeated failure to solve our economic problems just means that the medicine must be repeated, which reminds me of Richard Nixon’s motto that “if two wrongs don’t make a right, try three”.
I say “so-called” Keynesians because these advocates seem not to realise that Keynes’ theories did not rescue us from the Great Depression. They are also asymmetric in their application of his theories – calling for ever larger deficit spending, having overlooked the bit about running a surplus in a boom. But above all, they do not seem to realise that they cannot work in a period of debt deflation in which a recession is preceded by the collapse of the banking system, as their current failure is demonstrating.
To the ordinary person in the street, the idea that we can rescue ourselves from a crisis caused by excessive borrowing by borrowing even more must seem mad. In this respect they are possessed of far more common sense than those who are currently advocating just such a course of action and purport to be our leaders.
The first step in rectifying this situation should be to make a clear and unambiguous statement about the actual debt the UK is carrying.
To give a lead to this, today we have circulated to every member of parliament a tin can emblazoned with the UK debt figure – £3,589bn including commitments for public sector pension commitments, private finance initiative and banking sector guarantees, so that they can see what it is they are metaphorically “kicking down the road” with their present policies. This, ahead of the party conference season, I hope might spur some considered and honest debate on this issue.
It is time for those who wish to lead us out of this crisis to tell people how bad the current situation really is and the painful remedies which will be needed to remedy it.
Terry Smith, Chief Executive, Tullett Prebon, London EC2, UK
I get the impression that this man is not looking to be elevated to the peerage. Good.
Yet other people in the irregular banking sector don’t realize it: the Swiss central bank has just pegged their Franc to the Euro, which, for some reason (rum fellow that I am), has put me in mind of the TSR2.
Yet other people in the irregular banking sector don’t realize it: the Swiss central bank has just pegged their Franc to the Euro, which, for some reason (rum fellow that I am), has put me in mind of the cancellation of the TSR2.
Yes.
The actions by the Swiss in this and their apparent refusal to accept middle to long term outcomes would seem to me to indicate one, or a mix, of the following:
They are only interested in short term political survival.
They are being ferociously bullied and are cowards.
They have been promised a huge personal financial cushion that, sure, will be affordable way into the collapse by the top elite.
They are actually stupid.
There is a conspiracy to achieve some goal as yet unperceived.
Whatever they think theye’e doing, they are, in fact, setting up an enormous punt for the likes of George Soros.
I think they’ve also finally guaranteed the demise of the Euro.
[Keynesian measures] haven’t worked…
Spending about $500bn, actually a bit less, to plug a $2.5TR hole in the US economy didn’t work?
Say it ain’t so.
Keynesian measures haven’t tried.
That people are still demanding more austerity! Sheesh… the recession wasn’t enough for you guys?
In Re: “Keynsian”
I recommend reading:
Contra Keynes and Cambridge
which is Vol 9 of The Collected Works of F A. Hayek (U. of Chicago Press 1995).
“Keynsian” is not economic theory so much as social philosophy.
I leave with a partial quote from page 246 of that Hayek Collection:
” . . . the “Keynsian Revolution” will appear as an episode during which erroneous conceptions of the appropriate scientific method led to the temporary obliteration of many important insights which we had already achieved and which we shall then have painfully to regain.” (Hayak 1966)
Daveon,
It is worth noting that Keynes developed many of his ideas under the influence of Irving Fisher’s hugely important work, “THE DEBT-DEFLATION THEORY OF GREAT DEPRESSIONS” (which can be found online in its entirety with a quick google).
Prof. Fisher emphasized that the worst effects of a deflationary episode only occurred in the presence of excessive debt; without such debt, deflation would be momentarily painful but not crippling. Following directly from this, Lord Keynes himself said that demand-stimulus deficit spending should be strictly temporary, and that governments should run surpluses during good economic times to counterbalance such deficits.
It was only Keynes’s bastard pupils, chiefly state functionaries looking for a justification for spending money, who magicked up the idea that we should permanently spend more than we earn—in short, completely ignoring the lessons of Fisher which started the whole thing.
@ Mastiff –
Are you leaving out the other half Credit Inflation?
In a sense (although certainly not the one he means) Daveon is correct: Keynsianism hasn’t been tried. That’s because the corrupt, ignorant and venial politicians (and their economically illiterate enablers) who happily latch onto his prescription for deficit-financed demand-side stimulus during economic declines conveniently forget that he also called for government to run surpluses during the good times. That’s the part which has never been tried.
But of course in the sense he intends, Daveon is completely wrong. That $2.5T isn’t a “hole in the US economy”, it’s simply the amount by which government spending exceeded its revenues. The $500B “stimulus” is a part (a very large part) of that “hole”. A $1T “stimulus” would simply have meant a $3T “hole”. You can’t catch up that way, any more than you can lift up a bucket you’re standing in. It’s a fundamentally ignorant comment.
RSS,
If so, not intentionally. I’m citing Fisher’s 1933 article in Econometrica.
To be sure, Fisher was advocating deliberate “reflation” to counteract the deflationary spiral. But he also warned emphatically against excessive debt. All the statists tend to forget that part.
Laird beat me to the punch in his response to Daveon. To say that Keynesianism has not been attempted is bizarre: what does this man suggest, that we “spend” (ie, create out of thin air), say, $3 trillion?
Being Swiss, let me explain the reason for the SNB action.
Most of our economy is export based, be it precision machinery or tourism. The Swiss franc has increased massively in value compared to the currencies of our largest trading partners (Europe, and to a lesser extent, the USA). The high Swiss franc is beginning to seriously affect these industries – through no fault of their own, they are no longer able to compete on price. Tourism is falling, many industries are now selling their products at a loss, just to maintain volume, etc.
That’s the reason for the SNB action: pegging the franc to the Euro at a minimum of 1.2:1. You may agree or disagree with the action – but if you disagree, you must offer an alternative. What other action could be taken, to prevent massive economic problems within the country?
Right, so they’re trading some short-term price competitiveness for the long-term destruction of their currency and the further debasement of their once-sterling reputation (already tarnished by the abandonment of their bank secrecy principles). Smart move.
Laird: as I said, there’s really no point in stating your disagreement unless you can offer a realistic alternative. If half the companies in the country go bankrupt, that is also likely to have some long-term negative effects, don’t you think?
As long as the SNB is really, truly prepared to stick to its guns, and print as much currency as necessary, there is actually very little risk in this approach. When the Swiss franc (inevitably) begins to suffer devaluation as a result, they buy the francs back. Heck, the SNB may even make a profit in the end. However, this requires resoluteness in the face of inevitable pressures to abandon the program too early.
The biggest risk to the SNB and Switzerland is that the Euro-zone totally screws up, by continuing to bail out Greece, et al. There is no reason not to allow those countries to go bankrupt, and every reason not to let them drag the rest of Europe down with them. Far more important is getting the finances of the remaining countries under control.
Bank secrecy is another issue altogether, which I would be happy to discuss in a separate thread…
“The biggest risk to the SNB and Switzerland is that the Euro-zone totally screws up, by continuing to bail out Greece, et al.”
And you really don’t think that’s going to happen? In my opinion it’s inevitable, but if you feel otherwise I hope you’re investing heavily in Euros.
And you want an alternative? Here it is: Do nothing. Sure, some of your businesses might suffer some short-term reduction in price competitiveness*, but you’ll more than make up for it in the long run with the capital inflows as the Euro continues to self-destruct. And while you’re busy doing nothing, read Bastiat’s “What is Seen and What is Not Seen“, so you’ll better understand the benefits which are less obvious than the costs.
* “Half the companies in the country go bankrupt” ? Not happening; not even close. There’s more to competition than mere price.
Daveon.
Barack Obama has spent several trillion Dollars – not 500 billion Dollars.
Also I note your assumption that people who want lower government spending do so because we want the recession to be worse.
It must be nice to always take the establishment view on everything – it means you never have to do any thinking for yourself.
As for Keynes and Keynesianism.
The latest work on that is “Where Keynes Went Wrong” by Hunter Lewis.
I do not think much of the title – but the book is good.
To support what Brad is saying I work for a very large Swiss Engineering company and in the last six months simply because of the increasing value of the Swiss Franc we have gone from making reasonable margins to making losses which has caused prices to increase damn near month on month and have passed the point where the market can bear it and are losing work as a result.
Unless you are manufacturing some very specialized equipment which will be sole sourced you will always be up against competitive tendering with procurement through a purchasing group. All they care about is (i)are you technically approved and then (ii) are you the cheapest.
And competitive bid specs are written in such a way that a great range of companies from all over the world not facing the same unfavorable currency conditions will be technically approved and it becomes a straight up price fight which you will never win.
OK, I can accept that in your specific case, BFFB, but nonetheless the fact remains that in trying to protect your company and others similarly situated the Swiss central bank is destroying the currency for the rest of the population. This is a prime example of a narrow interest group making enough noise to attract governmental protection which is adverse to the interests of the (quiescent, and largely ignorant) majority. Unless the SNB recants, the franc will go down with the euro. This will not end well.
I note that in his latest post Detlev Schlichter has some pretty harsh criticism for the Swiss action, too. (It’s near the end of the article, but well marked.) So I’m not the only one.
“…the global foreign exchange market essentially constitutes a second-best solution by money users to cope, as best as possible, with politically motivated money segregation.” — from Detlev Schlichter’s book.
He’s arguing that ideally there would be a single commodity that is used for money around the world. Then there would be no government interference and presumably no Swiss Franc to become too expensive compared to other fiat currencies and inhibit trade.
Difficult to handle criticisms especially when you are working on this sector.