Splendid isolation ?

“Clearly, Field Marshal Haig is about to make yet another gargantuan effort to move his drinks cabinet six inches closer to Berlin.”

– Captain Blackadder [Rowan Atkinson], from ‘Blackadder Goes Forth’, written by Richard Curtis and Ben Elton.

By some accounts, the general populace in Europe during July 1914 was largely unaware of the imminence of war until the end of the month. “Enjoying the warmth of a golden summer, Europe’s citizens turned their attention chiefly to news of more local importance.” And then a network of alliances, and events, exerted their inexorable gravitational pull, drawing what would become millions into a pan-Continental mincing machine. Archduke Franz Ferdinand had been assassinated on 28 June. Austria-Hungary issued an ultimatum to Serbia on 23 July, and issued a formal declaration of war on 28 July. Russia and Austria-Hungary mobilised on 30 July. Germany demanded that Russia demobilise on 31 July. Germany and France ordered mobilisation on 1 August. By way of response, “Stock exchanges panicked and many were closed.” But it was a bit late by then. As the saying goes, if you’re going to panic, panic early.

The definitive text that addresses this human frailty is Irving Janis’ ‘Groupthink’ (Houghton Mifflin, 2nd revised edition 1982). Janis examined a number of US foreign policy disasters, including failure to anticipate the Japanese attack on Pearl Harbour; the Bay of Pigs fiasco; the decision to escalate the Vietnam War, and concluded that all of these decisions had incorporated groupthink, “a mode of thinking that people engage in when they are deeply involved in a cohesive ingroup, when the members’ strivings for unanimity override their motivation to realistically appraise alternative courses of action”. William H. Whyte apparently first used the term in 1952:

Groupthink being a coinage – and, admittedly, a loaded one – a working definition is in order. We are not talking about mere instinctive conformity – it is, after all, a perennial failing of mankind. What we are talking about is a rationalized conformity – an open, articulate philosophy which holds that group values are not only expedient but right and good as well.

Janis went on to develop the theory, stating that

The more amiability and esprit de corps there is among the members of a policy-making ingroup, the greater the danger that independent critical thinking will be replaced by groupthink, which is likely to result in irrational and dehumanizing actions against outgroups.

Here are some suggestions. The great euro project itself was a creation of groupthink (sparked by “illusions of invulnerability creating excessive optimism and encouraging risk-taking”). It was reinforced by “unquestioned belief in the morality [primacy in political and economic theory] of the group [primarily and initially France and Germany], causing members [other, later euro adopters] to ignore the consequences of their actions.”

As tensions and obvious fault-lines started to develop in the common currency zone, groupthink was there to ignore them. Closed-mindedness on the part of the euro zone’s political leaders “rationalized warnings that might challenge the group’s assumptions” and “stereotyped those opposed to the group [not least among which, the UK] as weak, evil, spiteful, impotent or stupid.”

Groupthink continued to exert its pressure toward uniformity, incorporating the “Self-censorship of ideas that deviate from the apparent group consensus”, together with “illusions of unanimity among group members, where silence is viewed as agreement”. There was “direct pressure to conform placed on any member [of the EU] who questions the group, couched in terms of ‘disloyalty’.” And there were “mind guards – self-appointed members [the European Commission among them] who shield the group from dissenting information.”

Consensus-driven decisions [the adoption of a common currency without a common Treasury or unified tax-raising authority and the abandonment of rigorous selection criteria for the adopters] caused the establishment of a unified currency bloc destined for failure, fuelled by the groupthink practices of

  • Incomplete survey of alternatives
  • Incomplete survey of objectives
  • Failure to examine risks of preferred choice
  • Failure to reevaluate previously rejected alternatives Poor information search
  • Selection bias in collecting information

..and not least,

  • Failure to work out contingency plans.

Another suggestion: just as they lost the plot in the run-up to war in 1914, the stock markets have been largely absent without leave of their senses as the euro zone moves inexorably toward explosion in 2011. Groupthinkers – Keynesians, more or less to a man – continue to believe that this is a problem that can be solved by the ‘big bazooka’ deployment of yet more money, more taxpayer milk dispensed from the giant teat of government. The reality is more prosaic, and more worrisome. Last week, the BBC’s Sarah Montague interviewed Kyle Bass, one of the relatively few investors who not only identified the sovereign debt crisis ahead of time but was able to profit from it. She resorted to the standard, lazy canard of citing speculation for the downfall of governments when the reality is that if governments don’t like the message they’re hearing from the bond markets, then they shouldn’t borrow more than they can afford from them. Or in Kyle Bass’ terms, “don’t hate the mirror because you’re ugly”.

The problem is two-fold but not distinctly so in that the culprits – ill-disciplined, over-indebted governments; and ill-disciplined, under-capitalised banks – are really joined at the hip,

two spent swimmers, that do cling together

And choke their art..

Forget bail-outs (although the euro zone authorities are unlikely to). The only ultimate resolution can be, in Bass’ words, massive debt restructurings and write-downs. Countries that have “sailed into a zone of insolvency” cannot be ‘resolved’. Their debts have to be written down. He also points out the inconvenient fact that only the UK and the US have made any progress in recapitalising their banks. But before we get to the fun of the debt restructuring endgame, we are likely to have to endure more fatuous money-printing at the behest of economically illiterate politicians and policy-makers. So there are two actionable conclusions: one is to maintain a defensive posture with regard to both debt and equity investments, especially in a European context. The second is to take advantage of any sell-offs to rebuild exposure to the one asset that is being fundamentally supported in this environment, namely monetary metal (gold and silver – and the mining companies represent arguably an even more attractive method than the physical of gaining inflation and currency insurance, given the unfolding macro outlook).

Or you could pin your hopes on wishful thinking. The eurocrats certainly are.

In explaining the conventional thinking behind ‘Why there could never be a war’, Captain Blackadder explains to Private Baldrick that

..in order to prevent war in Europe, two superblocs developed: us, the French and the Russians on one side, and the Germans and Austro-Hungary on the other. The idea was to have two vast, opposing armies, each acting as each other’s deterrent. That way there could never be a war.. [but] You see, there was a tiny flaw in the plan.. It was bollocks.

Before what came to be known as the Great War, Britain was the leading power in Europe. Many expected her to wait on the sidelines as the various power blocs clashed. Britain finally entered the war on 4 August 1914 on the back of a guarantee to maintain Belgian neutrality dating back to the 1839 Treaty of London. By 1945 and after two world wars and over a million of its servicemen and servicewomen dead, Britain had passed on the baton to the United States, and was inevitably diminished on the global stage. A policy of splendid isolation did not prevent her entry into hostilities in 1914. One can only hope that its equivalent today, in the form of our non-participation in the euro zone, will lead to a somewhat better relative and absolute outcome. It is quite clear that our current entente with the French is not entirely cordiale. Somebody should gently suggest to M. Sarkozy (and Frau Merkel for that matter) that when it comes to Europe, Britain has already done enough. If you break it, you pay for it.

This article was previously published at The price of everything

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One reply on “Splendid isolation ?”
  1. says: Paul Marks

    Sadly even Haig is being defended – and has been for years now (the establishment defending its own).

    First we have drivil biographies such as “Haig the Educated Soldier” (even the title of this book is absurd – I am not slavish fan of formal education, but I will point out that Haig did not get a degree at Oxford, he just networked whilst there, and when he sat his maths exam for the army Haig failed the examination – but was made an officer anyway).

    But more seriously old lies are comming back – for example “650 thousand Germans” destroyed at the Somme. This was a figure that Haig’s staff simply MADE UP, to make the boss look good, it is total nonsense. However, I spotted the figure in a little book (on “famous battles”) in a local supermarket (so the bullshit defence of Haig has come down from the universities – right to a supermarket near you).

    “But what has this got to do with economics” – quite a lot actually.

    For the same process (nonsense talk being presented as reality) is present in economic policy debates also.

    For example, we are told (endlessly) that “international insitutitons” must get unlimited supplies of money (at the very time when the British government is pretending to cut overall government spending), because if they did not then (horror of horrors) bankrupt countries (and bankrupt BANKS) would actually go bankrupt.

    The bankrupt actually being allowed to go bankrupt? Unacceptable! We must all spend an unlimited amount of money (to be produced from NOTHING) in order to prevent this.

    But nor is economic sillyness confined to official sources.

    For example, there are some “free banking” sites I know where even basic principles of reality are denied.

    A “loan” is a transfer of money from saver to borrower (either directly – or via a bank or other such) the saver sacrifices present consumption in the hopes of having greater resources to spend when and IF the loans are paid back. But not to people in charge of such sites.

    On the contrary, to them there is nothing wrong with treating a “loan” (or a cheque or a debit card or a….) not as a tranfer of money – but as the creation of “new money”.

    The old “crediting to the account” book keeping trick which means that, over time, “broad money” (bank credit) becomes much bigger than the “monetary base”.

    Of course such a credit money bubble eventually leads to a “bust” (it HAS TO – just as walking slowly, in massed formation, towards artillery and machine guns must lead to massive casualties).

    So what should happen then?

    Should prices and wages be allowed fall back down to the level they would have been if it had not been for the credit money bubble “boom” (created by the book keeping tricks) – as was the case in 1921.

    Or should the government step in as “nominal incomes must never be allowed to fall” the de facto mantra of Herbert “The Forgotten Progressive” Hoover in 1929.

    Well which?

    Some people (supposedly on the pro sound money side) are actually on the same side as the Keynesians – i.e. they will do anything (literally anything) to prevent price and wage rates falling (after a credit money bust). They will do anything to prevent markets clearing.

    Better that hundreds of thousands of houses stand empty – than that there is a “house price collapse”.

    And better that millions of people are unemployed than that “nominal incomes” (wage rates) fall.

    Of course there is no need for price and wage rates to dramatically fall (for malinvestments to be liquidated on a massive scale) if there is no credit money bubble in the first place.

    But they (our false friends) will not hear of that either – the credit bubble is sacred, all must worship the credit money bubble.

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