By Brian Cronin

Last Friday was the 25th anniversary of the Crash of 1987. On Black Monday, the Dow tanked 508 points (about 23%) and those who were invested lost over $500 billion. By January of 1989 it recovered all it had lost. Compared to where we are now, it was a drop in the bucket. Hardly anything happened in the foreign exchange markets that day. Traders, advisers and their clients looked on in awe as the value of their investments melted away and were more concerned about that than anything else.

Today, with the Dow still comfortably above 13,000 (for the moment), what’s on the horizon is the so-called “fiscal cliff” and the question is what Washington is going to do about it after the election. That plus the election itself has everyone greatly exercised. The presidential campaign has been trading the usual barbs, some quite ferociously, and at one point, one Democrat Congressman from California used the phrase “the big lie” but was quickly taken to the woodshed for a thrashing. Nevertheless, it is interesting to note how and where that phrase came about since it has such unpleasant connotations. So here’s a bit of history:

You would not normally expect to look for lessons in statecraft from the Nazis and still less look for guidance from the Führer himself, Adolf Hitler. Yet in his rambling autobiography and apologia pro vita sua, “Mein Kampf” (My Struggle) published in 1924, there are moments of startling lucidity. I will spare you the original German but it’s available if you want it. Here is what he said:

“The vast majority of people… more readily fall victim to the big lie than the small lie, since they themselves often tell small lies in little matters but would be ashamed to resort to large-scale falsehoods. It would never occur to them to fabricate colossal untruths and they would not believe that others could have the impudence to distort the truth so outrageously. Even though the facts which prove this to be so may be brought clearly to their attention, they will still doubt and waver and will continue to think that there may be some other explanation.”

If you repeat something often enough, people will eventually believe it. The Reich Minister for Propaganda, Dr. Joseph Goebbels, amplified that in 1933 with this gem: “Wenn du einmal angefangen hast zu lügen, dann bleibe auch dabei!”. Translation: “Once you have begun to lie, then you have to stick with it.” It typifies the modus operandi of quite a few politicians in the past and even some today, like Ferencs Gyurcsany of Hungary, though he did suffer some remorse in widely published comments. Here is what he said in a moment of rare candor on September 19, 2006. It is worth quoting in full because it is so unusual:

“There aren’t many choices (ahead for the government). There aren’t because we f****d up. Not a little, a lot. There is no other country in Europe that has shown such stupidity as we have. Obviously we lied through the past one and half, two years. It is completely obvious that what we said is not true. Meanwhile we have done nothing for four years. You cannot tell me of any significant government measure we could be proud of. If we need to give an account to the country of what we have done for four years, what will we say?

“(Finance Minister) Janos Veres is right. We can muck around a bit longer but not much. The moment of truth has come swiftly. Reform or failure. There’s nothing else. And when I’m talking about failure, I’m talking about Hungary, the left, and very honestly, myself. I almost died of having to pretend for the past year that we were actually governing. Instead, we lied day, night and evening. I don’t want to do this anymore. Either we go ahead (with reform) and then you have a leader, or you have to pick somebody else.”

Mr. Gyurcsany remained prime minister for another three years and his subsequent career has been checkered to say the least. The point of his outburst was that Hungary needed to make hard choices in order to join the EU. We now know that the Growth and Stability Pact rules for many were either ignored or the numbers massaged to ensure that nations who didn’t deserve to join made it into the club like Greece. That saga drags on interminably.

If the news media is complicit in transmitting favorable news and omitting bad news, politicians can get away with anything. Sooner or later, the media itself won’t be able to ignore the obvious and the public will catch on and turf the politicians out. But what if the only means of news delivery was government controlled?

In the Germany of the Third Reich, the means of delivering news and information was tightly controlled and all that was available were government approved newspapers and the radio. The Nazis made sure that homes were only equipped to receive government broadcasts over their radios, opposition newspapers were shut down and owners and workers thrown in jail, and anything they saw at the movies was controlled by Dr. Goebbels who appointed himself the “movie czar” two months after the Nazis came to power in January 1933.

President Harry S. Truman once said that a statesman is a politician who has been dead at least 10 to 15 years. Here are two that don’t even meet that criterion:

Pennsylvania Senator Simon Cameron was a contender for the Republican nomination for president in 1860. He lost out to Abraham Lincoln but eventually became Lincoln’s first Secretary of War. It was he who famously said: “An honest politician is one who, when he is bought, will stay bought”.

Senator Boies Penrose, also from Pennsylvania, who was in the pocket of the railroad barons, said in 1896: “I believe in the division of labor. You send us to Congress. We pass laws under which you make money and out of your profits you further contribute to our campaign fund to send us back again to pass more laws to enable you to make more money”.

What politicians tell themselves and tell the people they hope will believe them is what, at heart, the crisis in Europe is all about. If they once started telling the truth about how bad things actually are and let markets work the way Joseph Schumpeter and his fellow “Austrians” envisioned they would, maybe we would all be better off.

Politicians who tell the truth and are honest with the people seem few and far between. We have been so disappointed in the past that the term actually seems an oxymoron. It was, after all, Senator Penrose, referred to above, who said: “Politics is the last refuge of a scoundrel”. But with the US general election only a couple of weeks away now, you, dear reader, will have to determine which candidate fits the description of honest politician or scoundrel.

Apart from the fact that these are all fascinating pieces of history, why is it relevant? Two examples:

First example: Let me give you an important date: November 16th 1932. On that date, the Palace Theater in New York City, the pinnacle of achievement for vaudeville performers, switched to showing movies full time. Vaudeville had effectively died. All the well known performers who relied on telling jokes moved to radio and the movies. Later on, they moved over, many of them, to television.

In vaudeville, you could get away with telling the same jokes year round. It was fresh for every audience in every new town on the Orpheum and Keith circuits. Radio Pictures eventually bought all those theaters and absorbed those companies into what became Radio Keith Orpheum – RKO Pictures.

Once radio and later television emerged, these jokesters had to come up with fresh material every time they appeared. In the same way, and here is the point, markets today are voracious consumers of news, views and rumors. Trading rooms look like Mission Control, everybody has vast array of screens in front of them and all have access to the same information, news and rumor at exactly the same time.

There is little opportunity for taking advantage of discrepancies in pricing for precisely that reason. Forty years ago, it was different. After the Smithsonian dollar devaluations in the early 1970s, I saw “space arbitrage” take place at my alma mater, Bankers Trust London, of happy memory, only once.

Dollar/swiss was all over the place. The only way to find out where it was, was to call banks in Switzerland and ask for a firm dealing price. We called a bank in Zurich and a bank in Geneva. The offer of one was lower than the bid of the other. We bought from one and sold to the other. Prices gradually adjusted and they eventually came together. If I recall correctly, the trader managed to get three trades done buying from one and selling to the other with a substantial profit before the two Swiss banks realized what had happened. That cannot happen today.

Second example: I have written a lot about hyperinflation recently. It is defined as being inflation reported by the month rather than annually and then when it exceeds 50% a month. There is severe disequilibrium in the money supply relative to demand. New paper money with larger denominations cannot be printed fast enough and existing banknotes are overstamped with the new values. Brasil was famous for doing this. People spend money as fast as they can before prices change. They turn away from their currency, return to hard assets like gold and silver if possible and may even resort to a barter economy. The social fabric breaks down.

What do governments do? In order to cushion the effects on the populace, they will usually disguise the statistics or not report them as frequently as in the past. Lying always works when governments are authoritarian and control the apparatus of power and information delivery. If hyperinflation was ever to hit the United States, as some pundits are predicting, one wonders whether any government would be able to pull the wool over people’s eyes. Unlikely I think.

Markets today are so fast and interconnected and the information transmission so widespread with the internet and 24-hour cable television that it is just inconceivable that anyone could fall victim to the big lie. Consider the recent uproar over the suddenly much better U-3 unemployment rate and the suspicion that the numbers were fudged. Honesty really is the best policy. You don’t have to dissemble or remember as much.