As you contemplate the rise and rise of China’s planned economy, consider this passage from an anonymous bank official:
“We intended first to boost the stock and property markets. Supported by this safety net – rising markets – export-oriented industries were supposed to reshape themselves so they could adapt to a domestic-led economy. This step was then supposed to bring about an enormous growth of assets over every economic segment, followed by an increase of investment in plant and equipment. In the end, loosened monetary policy would boost real economic growth.”
Sounds about right, doesn’t it? There’s just one catch….
And we know what came soon after for the Land of the Rising Sun – a toppling weight of speculative mania collapse, coupled with a truly spectacular misallocation of resources and the dead weight of “zombie banks,” that hobbled Japan’s economy for decades running.
The above quotation is one of the many cited in the excellent “Devil Take the Hindmost: A History of Financial Speculation” by Edward Chancellor.
Having first read “Devil Take” many years ago, but never having reviewed it, we were inspired by recent events in China to pull it down from the bookshelf and reexamine the chapter on Japan.
The similarities – China now, Japan then – are notable.
Japan in the late 1980s, like China now, was a booming command and control economy. Officials at the all powerful Ministry of Trade and Industry (MITI) and Ministry of Finance, via the power of back channels, chose how to steer “Japan Inc.” at will.
Further evoking China, Chancellor observed of the Japan bubble that “speculative mania is often a symptom of hubris,” with great manias tending to occur “when the economic balance of power is shifting from one nation to another.”
As Chancellor describes the late 1980s scene,
“America was on the run. While Japan had its trade surpluses, America faced growing trade deficits. The Reagan administration also produced enormous budget deficits that were only sustained by the willingness of Japanese investors to sink their country’s trade surplus into U.S. Treasury bonds…”
As Yogi Berra might quip, re Japan vs. China, it’s “Deja Vu All Over Again.”
Or perhaps “Nobody invests there anymore, it’s too overbought.”
Those timely parallels aside, “Devil Take” is an engrossing book that traces the roots of financial speculation all the way back to Roman times. Thanks to Chancellor we learn the Latin meaning of the word speculator: It originally applied to sentries, whose job it was to “look out” (speculare) for trouble. Ancient Rome’s financial players, on the other hand, were known as “quaestors,” or seekers.
And the quaestors had much to seek. Chancellor reveals that two millennia ago there were joint stock companies with thousands of employees (slaves), public accounts, and even joint shareholder meetings with differing classes of company shares. One wonders if there could have been rough-hewn J.P. Morgans and Jesse Livermores of the Roman age.
Human nature was certainly the same. As Petronius Arbiter wrote of the Rebublic’s final years,
“…filthy usury and the handling of money had caught the common people in a double whirlpool, and destroyed them… the madness spread through their limbs, and trouble bayed and hounded them down like some disease sown in the dumb flesh.”
Thus beginning with ancient Rome and the origins of financial speculation, Chancellor then takes an erudite journey through the forgotten touchpoints of speculative mania history – from “stockjobbing” in the London boom of the 1690s, to John Law and the South-Sea Mississippi Scheme, to the “Fool’s Gold” of the 1820s and the Railway Mania of 1845.
The book then covers speculation in the Gilded Age, and rounds out the 20th century with a look at the crash of ‘29 and the go-go 1980s (via cowboy capitalism and, last but not least, Japan).
Needless to say, pollyanna permabulls will not much like this book. But for those with a natural contrarian streak and an acquired taste for the “dark side” (i.e. going short), “Devil Take the Hindmost” is a delicious and informative romp.
The lessons of speculative mania are clearly a warning to unrestrained bulls, but they hold an important message for bears too: Manias can be quite dangerous, fatal even, for those who stand in their path without yielding.
The persistently recurring nature of the episodes Chancellor describes – and the ability of froth to reach incredible heights – is great testimony to the old J.M. Keynes warning: “The market can remain irrational longer than you can remain solvent.”
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