A Christmas Carol
As Christmas Day approached, Alan Scrooge reflected that although not everyone was looking forward to the festive season, the family firm had enjoyed another record year. Since he had taken over the Family Reserve Board from his uncle, Paul Ebenezer ‘Humbug’ Scrooge, ten years ago, he had prospered. At it might not have happened had it not been for the change that came over Ebenezer shortly before he retired.
For years, Ebenezer Scrooge had been known as a man hard and sharp as flint, who despised Christmas, hated the company of his fellow man and was happy only when he was in his counting house, counting his money supply – which he targeted assiduously to make sure it increased by just the right amount each year. Indeed, the only thing he cared about more than his money was his reputation and the credibility of the Family Reserve Board (which had been in pretty poor regard when he himself took over, way back in the early 80s)
Then, one year, something happened. Ebenezer never spoke about it but a terrifying experience changed his whole outlook on life. Having spent his whole career trying to make sure his money supply didn't grow too fast, he was confronted with the risk of its growing too slowly, instead. That was a huge shock, so much so that when young Alan took over the family firm, Ebenezer’s message was that there is another way, a new paradigm, a path to a Goldilocks period where all is for the best in this best of all possible worlds.
Alan Scrooge took this message to heart and as the firm prospered, he employed more and more people, paid them more and more money and watched the company’s share price soar. His clerk, Bob Cratchit, was promoted to Treasury Secretary and even Tiny Tim followed in his father’s footsteps, becoming a partner at one of the firm’s subsidiaries. True, the company’s bank accounts with both the Bank of Japan and the Bank of Europe were deep in overdraft, but he paid his interest in full and on time, so Scrooge wasn't unduly worried.
As Christmas 1997 approached, and Scrooge prepared to relax with his wife in the comfort of his Virginia home, he took the liberty of opening a bottle of vintage port, lighting a long cigar and reflecting that he, unlike some of the managers of competitors’ firms in Asia and elsewhere, was doing rather well – and achieving this wealth without any of the nastiness that characterised his father’s era. Indeed, he was (he thought to himself) just about the most popular guy around these days.
After dinner, Alan received a phone call from an old G7 colleague, Karl-Otto Marley, who he had not seen for so long he didn't realise he was still alive, phones from his castle high in the Taunus Hills.
‘Alan, I know you think your uncle was a miserable old so and so but I fear you have gone soft in the head. Furthermore, the ghosts of your predecessors are inclined to agree with me. You've forgotten your principles and are so keen on having fun you could ruin the whole party. I have a message for you. When the clock strokes ‘One’ on each of the following three nights, you will be visited by a Spirit. Listen to what they have to tell you and ignore them at your peril’.
‘Oh stop being so miserable, have a beer and a bratwurst and call me when you’re in a good mood’ answered Alan before hanging up. Not in the least bit bothered, he settled down with his glass and drifted off to sleep, dreaming of excessive exuberance on his next vacation – at a beach resort in Thailand, which is such good value at the moment.
He was woken by the sound of the old clock above the fireplace sounding twelve. He looked at it, remembered what Marley had said and spent the next hour rather nervously watching the minute hand tick round. No sooner had the bell sounded the hour, than lights flashed and the curtains were drawn aside, by a mysterious hand.
‘What or who are you?’ screeched Scrooge, terrified.
I am the ghost of Christmas Past. And I have something to show you.
Scrooge was so scared it took a major effort to move but he had no choice other than to sit up and look at the television screen, which was flickering to life. What looked like an old newsreel came into sight. The first frame showed a hotel in New York – a hotel Scrooge knew well, the Plaza. There was a group of men in a meeting-room and he recognised his uncle, old Ebenezer. Then, the scene moved: He could see a big screen covered in numbers and Japanese symbols. In front of it were frantically excited traders watching a sea of blue as prices rose, seemingly fo ever. The film continued and now he could see Japanese tourists queuing in shops in New York and London, Japanese bankers buying works of art, and huge buildings. Everyone was smiling. But after a while, the mood in the film changed. Now the traders were watching red prices, falling and falling. The people in the streets were looking miserable and there were shots of tramps and beggars. Then, the screen went black.
What happened? Asked Scrooge
‘They believed in a new paradigm, thought asset price inflation didn't matter, because goods prices were under control. They allowed a liquidity bubble to build and it all went wrong. Good night.’
The next thing he knew, Scrooge was awake, in his bed, shaking. The pale light of dawn filtered into the room.
That night, Scrooge was nervous. He had been promised three visitations. Still, that didn't stop him eating a hearty dinner washed down with an excellent claret (the merits of a strong Dollar are many, he mused). After dinner, he smoked his cigar and went to bed, albeit a bit apprehensively.
This time, he did not know what woke him but when he looked at the clock by the bed, it was five to one. Five minutes later, he heard the clock downstairs chiming. Nothing else happened so he walked to the door and opened it. On the other side, stood another ghostly figure.
‘Come along’ said the spirit. I am the Ghost of Christmas Present, and I have things to show you’.
Scrooge followed the spirit into the living room, where the television came to life and people appeared on then screen. This time, he saw groups of people he knew vaguely from the Pacific Central Bankers’ Conference. They were discussing the merits of pegging their exchange rates to the Dollar. Then, he saw dealing rooms with people selling Dollars for Thai Baht, Korean Won and so on, while elsewhere in the same room, others were buying Treasuries of brash young Americans in braces. Then the scene moved on and he saw more happy people watching as large screens showed share prices rising, across Asia. He saw them build gold courses, and buy gold clubs, cars, airplane tickets and queue at shops across Europe and the US. They even bought real estate off the rather unhappy-looking Japanese he had observed the night before.
Then, he saw the central banks defending their currencies as they collapsed; share prices were falling, "For Sale" signs were on the luxury real estate projects, building sights were covered in idle cranes and the faces of the people were all dejected.
‘They fixed their currencies to a soft Dollar, woke up to find a strong one, failed to control their money supply, didn't watch their balance sheets and thought that asset price inflation is good. They allowed a liquidity bubble to build and it eventually burst. Good Night.’
The next thing he knew, Scrooge was awake in his bed, shaking, as the pale light of dawn once again came in through the window.
That evening, he limited dinner to a bowl of soup and lay off the wine completely. He didn't bother going to bed at all – he just sat in the living room, in front of the TV drinking hot chocolate and reading the IMF annual report. When the clock struck one, a knock sounded at the door. With some trepidation, he called out: ‘Come in, Ghost of Christmas Yet To Come!’
The spirit said nothing, but turned to look at the television.
This time, Scrooge saw himself, at New York’s swanky ‘21’ club, proclaiming the wonders of the new paradigm. He saw the happy faces as the big board at the New York Stock Exchange showed blue. He saw the rising Dollar, and the queues at the department stores. He saw ‘Sold’ signs on houses in the Hamptons and most of all, he saw brash young men wearing braces, smoking cigars and looking happy.
Then, he saw newspaper reports of profit downgrades, he saw people receiving notices that they had lost their jobs, in companies that exported to the East. He saw prices go up in the shops but nobody pay them. He saw banks merging but most of all, he saw the screens at the stock exchange turn red and the happy smiling faces turn grim. And the Dollar, his precious Greenback, did exactly what the Won, the Baht and the Yen had done before it, falling precipitously.
They thought there was a new paradigm. They thought asset price and wage inflation didn't matter. They failed to spot the deflation from the rest of the world. They allowed am, liquidity bubble to build ant it all went wrong.
‘But what can I do?’ asked Alan. ‘If I raise rates, it will make things worse in Asia. If I don ‘t, the bubble at home will get bigger.’
‘I am a spirit, not a shadow FOMC member’ said the ghost, ‘but if I were you, I would persuade Congress to increase the IMF quota, bail out those unfortunates in Asia, and raise rates a little to let the air out of your bubble. But what do I know?’ And with that, he vanished.