Guy Oppenheim The Inevitable Trek to Tyranny

By Toby Birch & Guy Oppenheim Oppenheim & Co. Limited “It is a mistake to look too far ahead. Only one link in the chain of destiny can be handled at a time”. This quote from Sir Winston Churchill is something of a surprise given that he was a lone voice opposing the appeasement of Germany prior to WWII. He did have a point about forecasting though. Few leaders seem capable of considering the consequences of their actions – especially the unintended variety. Reaction rather than action appears prevalent. While we are not all blessed with investment insight or prophetic visions, we can at least take time to look at the past. Comparisons with the 1930s are highly valid but there is little reason to expect an exact repetition. A domino-effect is too neat and orderly a description for events over the last 5 years that resemble a slow-motion motorway pile-up. Others have kindly described our book as one of the most prescient predictions of the credit crisis when it was published in 2007 (The Final Crash: Addictive Debt and the Deformation of the World Economy). It compared the build up of debt to drug dependency, dividing the phases into three parts, namely Party Time, Hangover then Detox and Rehab. With a little knowledge of history it was straightforward to run through a dress rehearsal of how the crash would evolve and escalate into other crises. At the time it was understandable to be belittled by doubters or worse still, ignored. At least one can hope that the author has credibility to make some comment on the future. The chapter entitled 2020 Vision ran through a scenario where a crash led to higher taxes, inflation and greater protectionism. It made the case that in times of economic distress politics will tend to swing to the far left and right and of course a common enemy must be pin-pointed and persecuted. Leaders down the ages have used such tricks to crush dissent and unite the populace through scaremongering. Little has changed. While President Roosevelt may justifiably be criticized for banning the public ownership of gold before devaluing the dollar during the Great Depression, he was at least correct in implementing banking reform, following the Wall Street Crash of 1929. Modern investigative committees appear to be a pale imitation of interrogators of the day like Ferdinand Pecora who exposed the double-speak of financiers with utter determination. The subsequent implementation of the 1933 Glass-Steagall Act clearly delineated retail banking from its much riskier investment banking cousin. After many attempts this was repealed in 1999 with the naive tech-bubble view that modern folk were far more sophisticated than their ancestors. We can now appreciate the shallowness of this philosophy as banks once more mutated into speculative monsters. The lending mechanism is now broken; why should banks bother to lend money to real businesses when they can borrow cheaply from the central bank (a right not extended to governments) and use funds to buy bonds for a risk-free ride, funded by the tax payer.

History shows us that the very act of allowing reckless financial institutions to collapse is far healthier than allowing zombie banks to drag down the rest of the economy. Whether by lobby group pressure, Party funding or a simple lack of knowledge, politicians of all hues have fallen for the mantra that saving the banks will save the economy. This is best illustrated through humour than vitriol. In one episode of BBC’s ‘Blackadder’, an Elizabethan quack doctor recommends continued bleeding by leeches for a pallid patient. The doctor cites counsel from the highest medical authority; who just happens own the largest leech farm in Europe. A similar quality of financial advice has been provided for the last 5 years by a clique of central banks, regulators and ‘industry experts’ from the same stable. Interestingly, one of the best success stories of bypassing the banking system occurred in Guernsey, transforming the island from debt-trap penury into a model of prosperity. The States committee consisted neither of lawyers nor bankers but entrepreneurial merchants who used interest-free finance for the benefit of the Bailiwick. Other echoes of the Great Depression centre on the emergence of trade tariffs and nationalistic behaviour. With the break-up of the Gold Standard, free-floating currencies caused chaos as every country adopted beggar-thy-neighbour policies of devaluation to gain a competitive pricing edge. Now, as then, the race to the bottom for currency weakness will eventually generate significant inflation; temporarily masked by a lack of credit creation in the banking system. World trade thrives on currency and financial stability which is what the Gold Standard delivered for much of the Victorian Age, albeit with some crises along the way. So why is this relevant today? If you mix the same ingredients together you will usually get a similartasting cake. In other words, by combining protectionist policies with political polarization, tension and commodity-driven conflict are the likely end-result. Many would argue that the lessons have been learned and that the prospect of totalitarian era is incomprehensible. After all, our children seem to study little else apart from Hitler in history lessons. While it is all well and good to analyze at the end result of tyranny, unless one understands its cause then dictatorship it is destined to be repeated. If anything we are in a worse position than the 1930’s as we have the perfect infrastructure to control, monitor and isolate individuals both financially and physically. The one-way extradition flow of Britons to America is a good example of such injustice where anti-terror legislation is routinely abused and applied to alleged financial, corporate or cyber crime. Our freedoms have been utterly subsumed with reams of legislation justified by the War on Terror. Just as regulatory institutions are riddled with conflicted financiers, politics is dominated by the legal fraternity determined to legislate ad infinitum to the detriment of the law-abiding and entrepreneurial class. Where it gets really scary is when one imagines a scenario under severe economic duress. This is when nationalist parties come to the fore of popularity and the apparatus of the state is hijacked and used to target whatever or whoever the common enemy happens to be. The economic and social implications are likely to herald a period of greater self-sufficiency and isolation along national and lingual lines. The emphasis will be on job creation through major infrastructure projects and a return to domestically-driven industries. The inflationary implications of a de-globalised world are substantial from the physical aspect of scarcity and

delivery plus the financial side from money-printing to fund such projects. This is where the Chinese and Russians have been so smart in dealing with resource-rich countries over the last decade in return for funding infrastructure development. The western model has for many years centered on military dominance or a debt-dumping exercise, forcing countries to export their raw materials to pay usurious interest bills. It doesn’t take a genius to work out whom developing countries would prefer to supply in future. It will be fascinating to see what imagery will be paraded by future dictators. The word for fascism stems from a symbol of Roman power; a bundle of rods wrapped around a magistrate’s axe designed for punishment. The illiterate Ghengis Khan was likewise famous for demonstrating that one arrow could be snapped whereas a combination of several was unbreakable. The message in both cases is clear; unity is strength. In an era of government spin and media euphemism, we should be truly terrified at the prospect of despotic rule. While there is little any one of us can do in an age where demonstration has been sanitized by aggressive policing, we can at least take out some personal insurance. Not in the form of a policy from your friendly broker but by way of precious metals, offering a hedge against inflation, currency crises and catastrophe that is portable and globally acceptable. Guy Oppenheim is the Chairman of the Oppenheim Group with over 25 years experience as a portfolio manager, investing globally in all asset classes. Guy Oppenheim has managed assets well in excess of $1 billion for institutional clients, sovereign wealth funds, and private families. Guy Oppenheim has been registered and authorized by Financial Services Authorities and served also as Compliance and MLRO Officer. Guy Oppenheim was educated in Geneva and holds a BA in Business Administration majoring in Finance from the University of Geneva.