of man to whom joint stock companies owe their success is not
the type of general manager who resembles the public official
in his ways of thought, himself often an ex-public servant whose
most important qualification is good connection with those in
political power. It is the manager who is interested himself through
his shares, it is the promoter and the founder — these are responsible
Ludwig von Mises (1922)
In my report,
Move to Liquidity," I pointed out that the state-salaried
bureaucrats who oversee the Chinese government’s $300 billion investment
fund in June bought 9.9% of the Blackstone Group hedge fund for
$3 billion. Within a month, this investment had fallen by $540 million.
In 1999, Great
Britain’s Chancellor of the Exchequer, Gordon Brown, instructed
the Bank of England to sell half of its gold reserves. The Bank
complied over the next three years. The sale was at market, which
at the time was under $300 per ounce. That decision has cost the
government over $5 billion, since gold soon climbed to well above
$600/oz. Mr. Brown is now Prime Minister. The British voting public
has forgotten all about it. In fact, most voters probably never
understood what all the fuss was about. They do not understand gold,
central banking, or the commodities markets.
Sunday Times did try to revive the story earlier this year.
In an April 15, 2007 article, "Goldfinger
Brown’s 2 billion blunder in the bullion market," we read
of the Times’ attempt to get access to official papers regarding
the gold sale.
For the past
18 months The Sunday Times has been battling the Treasury
to release the advice it received on the gold sales under freedom
of information laws. Brown’s department has sought — so far successfully
— to use a range of legal exemptions to block disclosure.
In its last
response to requests by The Sunday Times, the Treasury
stated: "We have decided that it is not in the public interest
to release further information."
This is a government
agency, and it can thumb its collective nose at the Sunday Times.
Mr. Brown is now Prime Minister. He can do the same. And will.
What is the
difference between Kenneth Lay of Enron and Gordon Brown of Great
Britain? This: Lay died in disgrace for not knowing what was going
on, while Brown was elected Prime Minister for not letting the press
find out what was going on. You ask: But how could this be? Simple:
Brown is a government official. Lay was the head of a publicly traded
corporation — what Mises identified as a joint stock company so
Mises saw the
problem over eight decades ago. The socialist, who he called an
etatist (statist), "refuses to see in those who guide the company
anything except officials, for the etatist wants to think of the
whole world as inhabited only by officials."
sees the ideal world as a gigantic Post Office. He thinks it is
possible to create unlimited wealth by printing up stamps.
for this view of the world is that everything keeps changing — including
the price of stamps (upward, always upward).
There are specialists
who forecast these changes and then plan for them. We call them
entrepreneurs. They put their own money or investors’ money at risk
(technically, at uncertainty).
Mises built his economic theory on entrepreneurship: men’s quest
for profit and the avoidance of loss.
Only a free
market in capital goods offers entrepreneurs a way to do their crucial
work of matching future consumers’ demand with future producers’
supply. But socialists deny the legitimacy of a free market in capital
goods. The State should own the means of production, they insist.
This creates a problem for socialist economic planners: dealing
with change. Mises wrote:
overlook the fact that even in a socialist community every economic
operation must be based on an uncertain future, and that its economic
consequence remains uncertain even if it is technically successful.
They see in the uncertainty which leads to speculation a consequence
of the anarchy of production, whilst in fact it is a necessary
result of changing economic conditions.
for democracies is this: the voters do not understand any of this.
mass of people are incapable of realizing that in economic life
nothing is permanent except change. They regard the existing state
of affairs as eternal; as it has been so shall it always be. .
. . To see and to act in advance, to follow new ways, is always
the concern only of the few, the leaders. Socialism is the economic
policy of the crowd, of the masses, remote from insight into the
nature of economic activity.
now fallen out of favor. This is not because the academic world
ever accepted Mises’ view of capital markets. Most of them never
heard of Mises. Even free market economists almost universally denied
his theory, which he presented in 1920 and extended in 1922 in his
The intellectuals abandoned socialism because the Soviet Union went
bankrupt in 1991, officially closing up shop — Enron on a vast scale.
In short, the commies stabbed the academic liberals in the back.
They have never quite gotten over this.
This has left
the central banks and the governments’ treasury departments as the
senior agencies in charge of the temple of government of intervention:
"Our Lady of Perpetual Debt." The Bank of England is commonly
referred to as the Little Old Lady of Threadneedle Street, and a
crotchety hag she is.
While the image
of a scientific socialist planner, slide rule in hand, has faded
in popularity, intellectuals and politicians still retain faith
in rooms full of Ph.D.-holding economists, faces in front of glowing
computer monitors. These experts are not quite the best and the
brightest. They are the ex-graduate students who were not quite
sharp enough to make it into the research departments of multinational
banks in New York City. They sit there, looking at spreadsheets
filled with numbers that were collected at the point of a gun by
high school graduates and then compiled by graduates of mid-rank
colleges, who are employed by the Department of Commerce.
people know what they’re doing!" we are assured by former B-average
sociology majors, who write government press releases, and also
by non-partnership level lawyers who got elected to Congress.
The heart of
entrepreneurship is not who certified you at age 25, but rather
what profits you have produced and for how long. When investors
turn over their money to someone, they don’t care about the diploma
on his wall. They care about his track record.
studied economics at universities that hire and fire professors
based on their ability to write unreadable and unread articles that
get published in academic journals reviewed by other college professors.
None of these people has started a billion-dollar company or managed
a large investment fund. When two Nobel Prize-winning economists
did provide the theoretical basis of such a company, it went bust
owing billions of dollars: Long-Term Capital Management, Ltd. It
was short-term capital management, but it surely was Ltd. It was
a lot more limited than its investors had suspected.
educational system is the ancient Chinese Mandarin system in action.
The Mandarin screening system for government officials was a written
test in classical poetry. The modern mandarin system is based on
writing term papers. For economists, the crucial features are formal
paraphernalia: graphs, equations, and such.
returns has nothing to do with formal academic certification, here
or in China.
of the Chinese government’s funds are graduates of Western university
programs in economics and business. The Chinese central bank is
like all of the other national central banks. It is staffed by the
not-quite best and brightest.
do not invest their own money. They have no experience as entrepreneurs.
They are babes in the leveraged woods. So, the first investment
they made was to buy 9.9% interest in a company that peaked in value
on the day it went public, a week later. Then its share price fell
by over 20% in less than a month.
This is the
wave of the future.
OF LAST RESORT
have always been lenders of last resort. They have always bought
their own governments’ debts. This is why governments originally
granted the monopoly of money creation to central banks.
banks buy the debts of major foreign governments. They prefer to
buy debts of those governments whose economies are trading partners.
Why? Because most governments are heavily influenced by exporting
firms. These firms want to keep their prices low, compared to foreign
firms. So, by purchasing the currencies of trading partners and
then buying foreign governments’ debt certificates, a central bank
pleases domestic exporters and foreign governments. It does not
please foreign exporters. But how much influence do they have in
is also detrimental to domestic consumers, who must pay more for
imports and also pay more for domestic goods because exporters have
shipped production abroad. But domestic consumers are unaware of
economic cause and effect. This is why they vote for politicians
who vote to raise tariffs (sales taxes). Voters understand almost
nothing about central banking, currency markets, and the nature
of fiat money.
So, as foreign
central banks load up on the promises to pay issued by the U.S.
Treasury, central bankers begin to think twice about investing in
American debt. Maybe it’s better to invest in American equities.
But how? "Buy shares of the Blackstone Group."
As this policy
spreads over the next few decades, the ownership of the equity markets
will shift from domestic pension to Asian central banks. This will
not happen overnight, but it is the wave of the future — or at least
the eddy of the future.
moves from private hands to central bank hands, managers of corporations
will have to pay attention to what central bankers expect. They
will have to listen to central bankers. If this does not happen,
then managers will not have to listen to anyone. The public will
have sold their shares to central banks. This is what a negative
savings rate means: the sale of assets.
Who is buying
corporate assets? These days, fund managers. But if the American
payments deficit continues at 5% to 6% of the domestic economy,
foreigners — mainly central banks — will wind up with even more
legal claims on future income.
would you rather have ownership of a diversified portfolio of American
corporations or a pile of IOU’s issued by the United States Treasury?
is this: the new owners are central banks, whose employees are not
paid for their forecasting ability on behalf of profit-seeking private
investors. They are salaried bureaucrats.
I am going
to cite a lengthy argument by Mises. I cannot put it better than
this. It has to do with the motivation of corporate managers, which
means the system of incentives they work under.
force and the effectiveness of the joint stock company lie in
a partnership between the company’s real managers — who generally
have power to dispose over part, if not the majority, of the share-capital
— and the other shareholders. Only where these directors have
the same interest in the prosperity of the undertaking as every
owner, only where their interests coincide with the shareholder’s
interests, is the business carried on in the interests of the
joint stock company.
to the senior managers of a privately owned firm that competes in
a free market for capital. These managers can be replaced by investors,
usually through a corporate take-over.
the public cannot fire central bankers. Rarely does any government
fire them. So, they seek their own interests. They are immune to
sanctions from outside the central bank.
directors have interests other than those of a part, or of the
majority, or of all of the shareholders, business is carried on
against the company’s interests. For in all joint stock companies
that do not wither in bureaucracy, those who really are in power
always manage business in their own interests, whether this coincides
with the shareholders’ interests or not.
The key phrase
here is "wither in bureaucracy." This is the essence of
all institutions that operate under a government monopoly, as all
central banks do.
It is an
unavoidable presupposition of the prosperity of the companies,
that those in power shall receive a large part of the profits
of the enterprise and that they shall be primarily affected by
the misfortunes of the enterprise. In all flourishing joint stock
companies, such men, immaterial of what their legal status is,
wield the decisive influence.
do not receive shares of ownership in the central bank. They are
Think of a
central banker as a postman. He wears a uniform: a dark suit. He
has control of the budget. And he sets the price of stamps.
We call these
We are seeing
the dawning of a new era. This era will be marked by central banks
as equity owners. The era of the central bank portfolio of nothing
but gold bullion and government IOU’s is coming to an end.
blast of the new era was the Chinese investment fund’s loss of $540
million in less than 30 days.
Think of the
capital markets run as extensions of the post office.
good news is that investors have more money than central banks do.
The bad news is that, at the margin, central bankers will be able
to manipulate the equity markets the way they manipulate government
This is very
bad news, indeed.