Lessons from the Mother Country
Last month, the lovely Miss Puddy once again accompanied me on a trip back to the mother country.
As some of you know, I am a seventh generation French colonist living in Louisiana. I was the first generation in my family not to learn French as my primary language. Although I speak very little French even to this day, the mere sound of it reminds me of my long-gone grandmother and numerous aunts and uncles. I can remember my father enjoying visiting with his family when I was a child just so he could once again talk the language that he first learned as a child. (My mother never spoke French, so it was never spoken in our home as I grew up.) My father only learned English when he began primary school. He said he got in trouble many times for not knowing how to speak English, but he caught on quickly because he was punished at school for speaking French. My grandmother, however, struggled with English and was always more comfortable speaking French.
My wife teases me that France is certainly the home of my ancestors. She says that she sees my nose on everyone there. I think that is a compliment, but I am not sure.
Given all my ties to France, it is fitting that one of the themes of the conference my wife and I attended in Normandy was "You have to know where you come from to know where you are going." It stressed that for family offices, family businesses and just families in general, survival requires a strong sense of family. Family stories, family get-togethers and family history are vital for keeping families strong.
As we traveled back to the mother country, I found myself wondering how brave my ancestor must have been to strike out from the comfort of centuries of culture in France to a wilderness frontier in the untamed territory of Louisiana. He was probably a second son who was not meant to inherit. Pierre LaBorde was a doctor, so he was educated and probably could have stayed in France and had a comfortable life there, but that was not his choice. Looking back, the comfortable choice has never been in our family tree. We have always been farmers, bankers and businesspeople who took risks, adapted and worked hard. This is our family heritage. I only hope I prove worthy to carry on in our family tradition.
A second theme of the conference was "The market is not a simple machine that can be easily manipulated, but rather a highly complex system." For example, the U.S. Federal Reserve feels that it can turn a dial and flip a switch and---voila!---everything will be fixed. Sometimes economists and financial institutions encourage us to believe that changing outcomes can be that simple.
For instance, several years ago, on a trip to London, the lovely Miss Puddy accompanied me to a visit to the Bank of England. The bank’s museum had a great interactive exhibit that explained economic levers in very simple terms. There was a large cutaway wicker basket that visitors could stand in while watching a monitor that showed a hot air balloon floating across the countryside. You were to fly the balloon by reaching up and alternately turning on and off a gas valve. When you lost altitude and wanted to go up, you could reach up and open the gas valve that fed a burner. And when the balloon rose too high, you could close the valve to allow the balloon to cool and drift back down.
My wife and I stood in the basket and watched the countryside as we “flew” along, alternately opening the gas valve and rising, then allowing the balloon to cool and drift back down when we applied too much gas. After a while, it was pretty easy to fly along at a constant altitude.
That was exactly what the Bank of England did, the exhibit explained. When its statistics indicated that the economy was losing altitude, it would lower interest rates and gas the economy. When the economy heated up too much and rose too high, the bank simply raised interest rates (closed the gas valve) and allowed the economy to cool off and drift back down. Everyone left the bank's exhibit feeling that it was really quite simple to operate the entire economy and that Mervyn King, who was then Governor of the Bank of England and Chairman of its Monetary Policy Committee, had things firmly under control.
The truth, however, is that economies are very complex systems. We reflected on the myriad factors that influence an economy while sitting at an outdoor café in Paris marveling at some of the 12 million or so residents that the Paris metro area holds. Just watching everyone on the sidewalk, in the subway and driving around as they went about their daily business was mind-boggling. Somehow they all had a place to sleep and managed to eat and drink as well as work and have families and friends and all the other components of a full life. And whenever we went to a café, there was always food and drink just for us. It seemed all of France grew grapes, raised ducks and brought them to that particular café just for us every day.
All of this was accomplished without government bureaucrats directing the goods to our table or to the tables of the other 12 million people there. Somehow the magic of the free market delivers not because of the government but mostly in spite of it.
If you have never read Leonard Read’s essay "I Pencil," which tells the story of the creation of a pencil from the pencil’s point of view, I encourage you to do so. Then read Hammer, which describes Armand Hammer's adventures in post-revolutionary Russia and the acute shortage of pencils that caused him to build a pencil factory there (among his other adventures). Both authors offer some good insights about the complexities inherent in any economy.
In the U.S., the government does a good job of ignoring those intricacies, even when the details are what really could provide good data about the economy’s movement.
One common culprit is the Federal Reserve. The hubris it shows is staggering! To begin with, the “altimeter” is faulty on the Fed “balloon” that reports the altitude of the economy. Take employment statistics as just one single example. After six months, if a person has not found a job, she falls off the statistical charts and does not exist anymore. If she were a chemical engineer, lost her job and was forced to take a job at McDonald’s flipping burgers, the Bureau of Labor Statistics considers her just as employed as before. There is no way to measure underemployment.
Another frequent offender is the Gross Domestic Product (GDP), which is calculated quarterly by the Bureau of Economic Analysis (BEA) and which is supposed to be a measure of all the goods and services produced in the United States. If I trade my cat for your dog, then there is no impact, but if I sell you a one million dollar cat and then you sell me your one million dollar dog, the GDP just increased by two million dollars. The more you work in business and report these numbers and the more you delve into the reports from the BEA, the more you realize that they are little more than a WAG. (Neither is guesstimation a new phenomenon. During the Truman administration, government bean counters tried to count boxcars of goods to try to get a better handle on the GDP total. Someone suggested building smaller boxcars to pretty up the numbers.)
Some economists try to measure total sales tax numbers to get a better handle than official BEA numbers or even try to estimate total electrical generation over a given period to estimate an increase or decrease in economic activity.
The other day the United States sold several million dollars of scrap gold to the Rand Refinery in South Africa, which has quite a surplus of refining capability as its gold mines slowly play out. The sale of that scrap gold collected from people throughout the U.S. was hailed as an advance in our balance of trade. According to the BEA, when we export scrap gold in the form of earrings, watches and necklaces swept up from the bottoms of jewelry boxes across the nation, we are making progress on our balance of trade. If we sold all of our tools used in manufacturing outside the country it would show a similar beneficial trade balance but just how beneficial would that be?
As with the BEA, the very numbers that the Federal Reserve looks at in its models are flawed. That is why the altimeter in its balloon example is broken. It doesn’t know the correct altitude. It doesn’t even know up needles from down needles or how to make the economy go up or down.
And is it bad when an economy heads south for a correction? Debts get sorted out rather than propped up, buggy whip companies go out of business in a timely manner and bad decisions get stripped out of the management teams. The “tightening and loosening the belt” model generally forges a robust system that keeps in check many of the dangerous parts of an economy, ones that can get over leveraged to the point of failure, and it also creates corporate structures that are appropriately sized for the management teams governing them.
The very idea that the government thinks it knows what it is doing should scare the hell out of every intelligent citizen out there.
Knowing where we have come from and just how complex the system is that we casually call “the economy” as if it is a mechanical system like a car, it’s good to note a few points about the long view.
First, the economy, unlike a car or a hot air balloon, is a complex system made up of the needs, wants and desires of hundreds of millions of living, breathing people, and the more its caretakers try to force it into overly simplified models, the worse its performance will be. Taking some of your dollars out of the economy and putting them into gold and silver is one way to diversify your risk in participating in an economic system that often doesn’t behave as expected.
Second, if you think in 20- to 100-year cycles, the market will eventually win out through some form of correction. Of course, that’s a long time to wait, which is another reason to diversify your holdings.
And last, excessive debt is bad. Excessive debt eventually brings down its owners, but growth on the other side of the corrections prevails stronger and healthier than before. Think long with your money, but enjoy the time with your loved ones now and celebrate where you have come from and where you are headed.
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