John Taylor's Midsummer Night’s Dream

Midsummer Night’s Dream

July 22, 2010

By John R. Taylor, Jr., Chief Investment Officer, FX Concepts

Here in Paris, the stores on avenue Matignon and rue du Faubourg Saint-Honoré are packed and long lines snake into the Louvre and other museums – the summer is wonderful. And in London and New York, as well as the Côte d'Azur and the Hamptons, it is just the same, as those with money and credit leave their worries behind. It’s hard to believe that the world isn’t in great shape. As a bear, sometimes I even feel guilty for harboring negative thoughts and raining on the triumphal parade of the ruling classes. The wealthy centers of the European and American capital cities do look better and better every year, but the business and editorial pages of the leading papers tell another story. The financial picture is deteriorating at an accelerating pace, and now even the major governments, bulwarks of the free market system, are threatening to slide into trouble. The latest phase of this has been the creation of large amounts of high powered money, issued to benefit and support crucial financial actors within the system. Finding a home for this excess liquidity has resulted in a continuing series of bubbles, large and small (one of which is the beautifully renovated monumental buildings in central Paris).

Although we have not done a word content analysis for ‘bubble’, it is our opinion that in 2010 this word has appeared more often in the financial and general press than at any time since 1720, when the Mississippi Bubble and the South Sea Bubble topped the charts in Paris and London. Does today really have parallels with 1720? That’s what vacations are for: thinking of things like this, reading murder mysteries, romance novels and financial histories, and fantasizing. After reading This Time Is Different by Carmen Reinhart and Kenneth Rogoff, which we all should memorize, I wished that their analysis had gone back to the period before 1800 as it seemed to me that the most interesting financial conflagration of the last 500 years occurred in 1720. Central banks were just beginning and the big powers were struggling with monumental debts. The British had just gone through a long revolutionary period that ended in 1688, and the “Glorious Revolution” seemed to bring a new mercantilistic twist to finance, leading to the creation of the Bank of England. The large government debt was absorbed through the Bank’s expanded liquidity and the economy grew rapidly, spawning many other joint stock companies. The most famous of these was the South Sea Company, founded in 1711, which, by promising to finance the government dramatically expanded liquidity, but it was never profitable, and eventually collapsed. The Bank of England and the British Treasury managed to avoid default, retiring the debt over many years but the economy suffered for decades. In France, the death of Louis XIV, a singularly expansionary and profligate monarch, caused the government to default in 1715. John Law arrived and introduced a bank, the Banque Royale, with the guarantee of the king to issue paper currency backed by the revenues of the Mississippi Company. The success of his venture led to the circulation of far too many banknotes, and the bubble collapsed in 1720. The French economy went into a long chaotic decline, never really recovering and ended in revolution by 1789.

The Bank of England was the first central bank and John Law’s bank was the first to act like a modern central bank. These independent banks were there to finance the government. Although both governments needed liquidity to satisfy their debts, the banks expanded so much that the economies were stronger too. However, despite the multitude of investors attracted by the  bubbles, eventually the commercial operations could not support the debts and a collapse followed. The British took a deflationary path, while the French one seemed erratic but generally inflationary. Neither brought economic relief in the next decades, but the British tactics eventually built a sounder economy.

h/t Teddy KGB

Comments

[Cognitive Dissonance]

Wow, 14 front page stories in four and one half hours. Tyler's on a roll today. Keep it coming. Your ZH reading audience can't get enough of it.

"....but the business and editorial pages of the leading papers tell another story. The financial picture is deteriorating at an accelerating pace, and now even the major governments, bulwarks of the free market system, are threatening to slide into trouble.

Strike the "threatening to slide" part of this statement and replace it with just "sliding". Now it more accurately reflects current reality.

[Turd Ferguson]

TD might want to keep an eye on this, too.

I'm not a meteorologist but, with negligible shear over the Gulf, I'm harding time seeing why this won't intensify to something more significant than a TS over the weekend.

http://www.nhc.noaa.gov/storm_graphics/AT03/refresh/AL0310W_NL+gif/14591...

[RichardENixon]

Mets have a better record predicting direction than intensity. I think this one will come in as at least a Cat 1.

[almost_have_a_name]

Tyler seems to have multiple personalities under the hood. There's a doctor for that. 

[doublethink]

As a bear, sometimes I even feel guilty for harboring negative thoughts and raining on the triumphal parade of the ruling classes...les cons emmerdants.

[Pamela Anderson]

Thanks Zero Hedge.... John "Mr. FX" Taylor one of my favorites!

John Taylor Bio. (by Bloomberg) ----> http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=awPlkg9zw9Wk#

[Stu]

Hungary tells the IMF to take a hike ..

http://euobserver.com/9/30525

[uno]

Oh what the hell

South Sea, beetches

[Turd Ferguson]

Wait a second...I thought that all was suddenly well in Europe...at least that's what CNBS told me was the "reason" for the 25 S&P points added this morning.

Shit, I'm sure cornfused now. Just a dumb hick from Kansas, I guess.

[Cognitive Dissonance]

Turd Ferguson, I think I see the problem.

We're not in Kansas anymore. :>)

[Turd Ferguson]

there's no place like home. there's no place like home...

In that theme, check out this new video of Timmy, Benny and Robert Reich.

http://www.youtube.com/watch?v=k_CAs3q7G48

[Cognitive Dissonance]

LOL

As soon as I read your post about the three amigos, and considering the theme, I suspected I would be seeing the Lollipop Kids if I clicked the link. And you didn't disappoint me in the least.

Turd Ferguson. Old reliable. :>)

[RockyRacoon]

That yellow brick road is going to get well worn if this keeps up.

Watching CNBC (actually silently on in the background) and I'm in deep amazement at the deck chairs being frantically rearranged.   Market went down yesterday because of Ben's testimony -- market went up today for the same reason?  Gimme a break.

My patience is wearing thin...

[silver surfer]

Details on the South Sea bubble, John Laws paper money scam, the Tulip mania and a brief history off the Alchemists and more is to be found in Charles Mckays Extraordinary Popular Delusions and the Madness of Crowds

Its one off the GOOD old classics! Enjoy

[trav7777]

Bank of England founded 1694.  Massive global bubble ensues, unprecedented, within 20 years.

And we are supposed to believe that they just got it RIGHT this time?  ROTFL.

This shit is what the founders of this country were FLEEING from.  The depradations of the banker clan and the system it brought.

[Island_Dweller]

Federal Reserve founded 1913.  Massive global bubble ensues, unprecedented depression, within 20 years.

There, I only had to change a few words....

[nevadan]

"The Bank of England was the first central bank and John Law’s bank was the first to act like a modern central bank."

Actually I think Sweden had the first central bank.  The BOE was the first to do what central banks do best, which is finance wars, in this case against the Dutch.

http://en.wikipedia.org/wiki/Sveriges_Riksbank

[RockyRacoon]

ARE WE SETTING THE PINS UP FOR AN ALTERNATIVE RESERVE CURRENCY?

Are we moving towards the BIS and IMF being fractional reserve banks that will create money & credit - a reserve currency that will satisfy Russia and China with an element of Gold backing? A bank such as the BIS could easily assume this role (if it hasn’t already) as could the IMF with possible banking charter adjustments.

The chances are high that this is the roadmap we will find ourselves taking. Like all banking that started as Gold backed you could expect that in this case the little gold backing that starts the process is quickly diminished so a limitless money machine could begin functioning. The gold backing would likely be an initial requirement by Russia and China. The partial gold backing would lend credibility to the acceptance and a possible reserve currency alternative and eventual establishment as the global

reserve currency.

http://home.comcast.net/~lcmgroupe/2010/Article-Sultans_of_Swap-Gold_Swaps.htm

[anony]

Guess you've never heard of Wampum.  Worked out just fine for the purchase of Manhattan. 

Step back a bit further than 1711 for the full story.

[TraderTimm]

Here's a link for those who didn't want to dig around.

http://www.gutenberg.org/etext/24518

Extraordinary Popular Delusions and the Madness of Crowds - Mackay

In several formats for your e-book pleasure!

[Fix It Again Timmy]

Ok, you take out a 30 year mortgage, buy a house and diligently work for 29 years and 11 months, paying your mortage on time every month [359 months].  Suddenly, due to circumstances, you cannot make the last payment!  You lose!  The bank having taken your money for the last 359 months not only has your money but also your HOME!  I ask you, what can you expect from a system in which this is the norm and who has declared this manner of robbery and what justification was used? 

[Pooh-Bah]

Or you could make the final payment but not be able to make the property tax payment and forfeit your home to the county.

[Pooh-Bah]

If you don't follow the rules in the US they will either take your money, take your freedom, or both.

[Amish Hacker]

I hope we don't end up like France: when the bubble popped, it took nearly 70 years before there was regime change.