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The worst mistake I have made in recent years in economic forecasting was
to expect the 2000 crash well before it happened.
I should never have tried to put a time to the downswing at the end of the boom, and
I am not about to repeat that mistake.
William Rees-Mogg Feb 23rd, 2007

The Congressional enquiries after the 1929 crash largely focused on the disaster of over-leverage in circumstances of recession. The metaphor is that of the sailing ship. An over-leveraged company has a huge spread of sail, and can travel fast in favourable conditions; in a great storm she can keel over.

Now we have a fashion for high leverage - in derivatives, in private equity and in hedge funds. The global financial system has spread its sails. The momentum is awe-inspiring.

Full text

Derivatives - Hedge Funds - Carry Trade

Om boken "Blood in the Streets" av James Dale Davidson och William Rees-Mogg -
Rolf Englund, "Den annalkande stormen", Svensk Tidskrift nr 9/1987

Lord William Rees-Mogg, The Times, October 5, 1998

The free-fall in markets across the world is inevitable after years of profligate credit

It's hurting, but we deserve it

When one reads of stock market crashes, one needs to think of their impact on individual lives, poor or rich. Take, for instance, Hans Schmidt, who perhaps works for a big German bank in Düsseldorf. He is happily married, with three children, and lives in a suburban house. He is 45 years old, and plays golf at the weekends with friends from the bank.

In mid-July, he was thinking happy thoughts. He looked forward to his future at the bank, and hoped that he had good prospects of promotion. His savings had been prudently invested. Since leaving university, he had built up a portfolio of leading German companies, worth Dm 1 million. By the time he retired, he hoped these shares might be worth Dm 3 million, perhaps even Dm 4 million; with further saving and his pension, he would be quite a wealthy man.

That was only 12 weeks ago. He took his holiday in August, in Italy. Now the sun-tans have faded. He is hearing ugly rumours in the bank that whole departments may be made redundant. He wonders whether he will still have his job at Christmas. He plays golf at the weekend, but his friends notice that he is less relaxed and drinks a bit more. His nest-egg is now only worth Dm 640,000 - a useful sum, but not enough to last a lifetime. His grandparents were bankrupted by the great inflation of 1923; his parents were ruined in 1945; Herr Schmidt is wondering whether this will happen to him. Fear is back in Germany.

Not only in Germany. From their high point earlier this year, all the world's stock markets have fallen. Wall Street, where the bull, though badly wounded, is still kicking, is down only 17 per cent; London is down 23; Tokyo, 24; Paris, 31; Frankfurt, 36. The Moscow stock market is down 90 per cent; it is kaput. Fear has become universal; hardly any investor thinks the fall is over. The Asian flu has spread to the stock markets of Europe and America.

Yet while shares have fallen, and are expected to fall further, bonds have risen, and are expected to rise further. Long-term interest rates have been sharply reduced. In Germany, the 30-year bond yield has fallen to 4.79 per cent, well below the 5 per cent threshold. In the United States the yield is 4.98; in the United Kingdom, 4.40; in France, 4.85; in Japan only 1.24. As well as bonds, that uncouth old warrior gold has risen, almost from the grave.

Successful investors let the market talk to them. What is this market saying? Both the fall in share markets and the rise in bonds speak of deflation, of falling prices, of falling profits, of rising unemployment, of faltering economies. This is the first deflationary crisis the world has experienced since the 1930s. The 1970s had an inflationary crisis on at least an equal scale, but inflationary crises work out in a very different way.

The bond market is telling us such good news as there is. Interest rates are going to fall much further. British short-term rates will come down most sharply; at 7.5 per cent, they are out of line with everything else in the market. The Bank of England and the hedge funds must share the 1998 prize for misjudging the market; it is worth noting that Kenneth Clarke's interest rate policy, if the Tories had won the 1997 election and he had remained Chancellor, would certainly have been closer to reality than the independent policies of the Bank.

All the markets are in agreement that the correction has further to go. The technical pattern looks horrible, with big falls following each other, and only the weakest of rallies. These may have been the first weeks of a longer-term bear market in the West, following that of the East. Wall Street is the exception, but looks very vulnerable. At some point there will be a rally; there are large short-sale positions to be closed, and institutional funds are full of cash. Yet the rally, when it comes, is not likely to change the longer-term trend.

The lesson of the 1930s is that a deflationary crisis is destabilising and dangerous for all governments. In some countries, democracy was overturned; the great slump brought Hitler to power. In the United States, the Republicans were in office in 1930, lost the election of 1932 and did not regain power until 1952; in Britain, Labour was in office in 1930, lost the election of 1931, and did not regain power until 1945. If the present global deflation cannot be stabilised, Labour could again be a one-term government and William Hague's Yorkshire pragmatism could prove much more significant than most people yet expect. In my experience, realism works better than idealism in financial affairs.

President Suharto of Indonesia has already had to resign; the next regime to be destroyed may well be in Russia, where the Yeltsin-Primakov Government seems to be doomed. The successor regime could either be based on the Army, possibly represented by General Aleksandr Lebed, or on money, possibly represented by Yuri Luzhkin. In these contests for power, guns usually count for more than cash. Liberal capitalist democracy has failed in Russia to deliver a stable economy, and will be remembered for corruption, the Mafia, and unpaid public servants. Possibly for starvation as well. In the United States, Bill Clinton combines the character of Warren Harding and the situation of Herbert Hoover.

Big deflations lead to protectionism, regulation and devaluation. Hitler's policy of autarchy and rearmament did create full employment in the Germany of the 1930s; it was far more successful than Franklin Roosevelt's New Deal, though it might have collapsed in the 1940s if Germany had not gone to war. Fixed currency arrangements of all kinds tend to be discarded or devalued in a slump. Britain left the Gold Standard in 1931; Roosevelt devalued the dollar in 1933; in 1997 the Asian countries mostly had to devalue, though Hong Kong has so far retained its dollar peg. The European single currency will be launched next year in very difficult conditions.

The new global game is therefore being played for the highest possible stakes. There is a logical difficulty at the heart of the problem. We are seeing a major correction after a long period of global excess of credit. Unless the correction is allowed to happen, the world economy cannot be restabilished. If the authorities were able to blow the bubble up again, that would make things even more dangerous. Policy has to accept the inevitability of the correction, but stop the correction itself from running out of control.

The conjuncture of political weakness and deflationary pressure is very dangerous. For different reasons, there is a vacuum of leadership, either from the IMF, which has made its own mistakes and is short of funds, or from the United States, where the President is threatened with impeachment, and Washington is gridlocked. The huge electronic flows of short-term funds would be extremely difficult to control, in any case. Such leadership as there is comes from Alan Greenspan, the chairman of the Federal Reserve Board. At least he will not repeat the mistakes of the 1930s; he is one of the few world leaders who was alive at the time.

Rees-Mogg har även utgivit bl a "Democracy and the value of money : the theory of money from Locke to Keynes"

Från amazon om "The Sovereign Individual : How to Survive and Thrive During the Collapse of the Welfare State":

Davidson and Rees-Mogg still hold out for the apocalypse. They've been sounding the alarm for more than a decade, first with Blood in the Streets: Investment Profits in a World Gone Mad (1987) and then in The Great Reckoning: How the World Will Change in the Depression of the 1990's (1991).
What sets their books apart from those of other doomsayers is that a number of their specific forecasts have been accurate; it is their overwrought analysis than has gone astray. This time around they see citizenship becoming obsolete and national governments irrelevant. Violence will become more widespread and organized. In cyberspace, individual differences will no longer matter but know-how will mean everything. There will be a total transition to "the cybereconomy." The authors' warning: take cover while you can and take your money with you!

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