The Big Bang in London
BROCKWAY, GEORGE P .
The Dismal Science THE BIG BANG IN LONDON BY GEORGE R BROCKWAY With its characteristic penchant for triviality, the daily press' stories about the deregulation of British financial institutions...
...and if T. Boone Pickens squints his eyes, feverish attempts are made to discover the meaning...
...In addition, the very existence of a speculative market introduces a Catch 22...
...They' re right on the first and last points...
...Will he be able to compete with Yahoos in shirtsleeves...
...That leaves the option of reducing expenses...
...But this is not all that a business does...
...These things are as solid and stolid as they ever were, and are correspondingly unattractive to speculators...
...consequently, the new liquidity doesn't stimulate the production of more of them...
...It is not, however, clear exactly what is liquid...
...Speculation is a problem, and it is not one that cures itself...
...The economy may be essentially flat, yet day after day investors run from one takeover rumor to another...
...The next day the principal stockholder, speaking for his sisters and his cousins and his aunts (their grandfather started the company), phones the company president all the way from his yacht in English Harbor, Antigua...
...You have only to read the Wall Street gossip columns to know this is so...
...We don't have to carry our story any further to see that, no matter how it comes out, bankers and stockholders have more options than do corporation managers and workers...
...it is much easier to play with what is at hand...
...Increasing income isn't the easiest thing to do...
...Production runs can be cut back and inventory allowed to run down...
...They avoid taking physical possession of and physically working with the things denominated in their bonds...
...Securities are more liquid than people...
...These are the people and institutions who will benefit from the Big Bang...
...Traditional economists have built their theories on the notion that people are inherently or rationally or necessarily profit maximizers...
...In the long run—and in thesituation we' re imagining, sixmonths can be a long run—these cost-cutting measures may prove counterproductive...
...Because speculation encourages and thrives on running up the prices of securities, it will tend to reduce the earnings ratio of companies that attract its attention...
...Liquidity also makes volatile trading possible, with sudden shifts of position to pick up a fraction of a point...
...Margaret Thatcher's Britain, which has now done this, and Ronald Reagan's America, which would dearly like to do this, both also have doctrine to sustain them...
...Workers and managers have personal commitments and can't easily relocate even when jobs are available...
...I don't myself hold with the notion, but I'm going to accept it here to meet the traditionalists on their own ground...
...So what is left for international liquidity to do...
...Untram-meled finance, they believe, makes for liquidity, and liquidity encourages investment, and investment means production, and production means prosperity...
...If the Reagan Administration gets its way, this differential will disappear (and if I had my way, it would not be available...
...Eurodollars are available, because of the lack of regulation, at a slightly lower rate of interest than domestic dollars...
...Internationalizing Britain's financial markets may give employment to a few hundred Yahoos in shirtsleeves, but it will do nothing for productive industry, either in Britain or anywhere else in the world...
...Back in The New Leader for April 19, 1982, Henry C. Wallich, a governor of the Federal Reserve Board, took me to task for not recognizing that liquid securities make everything liquid...
...To the extent that Mises meant what's to come is still unsure, he was of course perfectly correct...
...Eventually," he wrote, "the money [resulting from a speculative coup] will find an outlet in directly productive new investment, unless it is consumed or hoarded...
...the absolutely perfect way to cut costs is to go out of business...
...International liquidity may make it somewhat easier to sell a large company, but this does not mean the sale stimulates the creation of anything new...
...They base their arguments on Ludwig vonMises' dictum, "Action is always speculation...
...The difference between Governor Wallich and me is by no means an idle one...
...I replied that there is a fourth possibility, which is by far the most likely—namely increased speculation...
...You have to spend a dollar to make a dollar...
...Advertising campaigns can be trimmed or aborted...
...There is no need to create a company in order to sell it...
...There are repercussions on Main Street and Commercial Street, too...
...If I am right, speculation will tend to pre-empt whatever money the banking system makes available, and productive industry will be starved...
...The Dismal Science THE BIG BANG IN LONDON BY GEORGE R BROCKWAY With its characteristic penchant for triviality, the daily press' stories about the deregulation of British financial institutions (a.k.a...
...but if the company has been reasonably well-managed, its prices are already at the most profitable level...
...This can certainly be done, and done quickly...
...Fortunes can be made very fast that way (see "New Ways to Get Rich," NL, September 8...
...It adds value to what it takes in, and what it puts out increases the goods the rest of us can enjoy...
...Give bankers and brokers and insurance companies their heads, and they'll make your head swim...
...For a variety of reasons—some doctrinaire and some pragmatic—the world has already decided that international finance should not or cannot be regulated...
...If we had any sense, we'd keep ourselves and our money out of it...
...The banker and the stockholder (who have contrary concerns) may even be bright enough to understand this, but they are also bright enough to see that they might make more money or safer money by lending or investing elsewhere...
...all it takes is a phone call to the agency...
...When the company's financial officer needs the usual line of credit to tide the firm over from the start of aproductionrunto the time, a few or several months away, when income will start flowing from production, he has his regular lunch with the company's friendly banker...
...Speculators or financial institutions attempt to increase price, but add no value...
...A company that earns $5 a share has a price-earnings ratio of 5 per cent if its stock sells for $100 a share...
...International finance may make it somewhat easier for a large company to borrow large sums...
...The money may come back, via another blip, as the earth turns...
...On this ground, it is clear that a speculator who makes a killing in one speculation will look around for more of the same...
...Every kind of activity is risky, but the liquidity of securities reduces the risk involved in investing them...
...They have other options...
...And of course people can be fired...
...He notes that many other stocks have a better PE ratio and wonders what can be done...
...the Big Bang) have concentrated on the consequences, or lack thereof, for the traditional City of London man with his bowler and his tightly rolled umbrella...
...It comes down to speculation in existing securities or in securities issued for the purpose of speculation...
...Sales also can be improved, at least in theory, by cutting prices...
...That is why the money growth the Federal Reserve Board has allowed since 1982 has gone into the runups of the securities and commodities markets, and not into what Governor Wallichcalled "brickandmortar...
...The latter is unexpectedly cool and murmurs that in view of the falling PE ratio he'll have to ask another half a point for the credit...
...once the stock takes a modest run up to $125, its l'E ratio will naturally fall to 4 per cent...
...The liquidity part of the story is limp-idly clear...
...Moreover, every business tries, within limits, to buy its inputs as cheaply as it can and to sell its outputs as dearly as it can, and so sometimes makes (or loses) a dollar on inventory...
...the Hong Kong deal will be recorded only as an electrical impulse in a computer...
...The money that bankers and stockholders invest is more liquid than the sweat and tears the active people invest...
...They can try to increase income, or reduce expenses, or both...
...In contrast, it generally takes a lifetime to accumulate a modest retirement nest egg merely by working hard at producing something...
...He will have your notarized signature many times on all that paper to show for his deal with you...
...Only a foolish profit maximizer would ever commit himself (or herself) to a "directly productive new investment," especially one that required any hands-on productive work of him (or her...
...A Singapore computer chatting up one in London doesn't make it noticeably easier to sell a shirtwaist factory in Katmandu or a spare forklift truck in Trondheim...
...The company' s management has options, too, except they are more limited...
...Perhaps this is as it should be, since the consequences for the rest of the world are only as great as it allows them to be, and the rest of the world has already made its decision evident in Tokyo and Zurich and the Bahamas and New York and even in Chicago...
...There are, to be sure, some economists who believe that speculation is actually beneficial...
...In these circumstances, the pragmatic may well lie back and enjoy it...
...Should he and the ladies mortify their family pride and sell out, or can the president somehow improve the picture...
...While it would take you six months, together with fees to two teams of lawyers, premiums to at least one title company and a half-inch pile of paperwork, to induce your friendly banker to spring for a $50,000 mortgage, that same banker will transfer $50 million to an arbitrager in Hong Kong in the twinkling of an eye...
...Sales can be improved by introducing new products, but that takes time and money, neither of which the company has enough of...
...Now, it is obvious that, in what are called real terms, the company is as good as it's ever been and earns as much in dollars and cents as it ever did...
...Computers are too fast, and their ways too mysterious...
Vol. 69 • November 1986 • No. 16
