A Pact with the Devil
By Joe Average
May, 2006
www.lifetoday.com.au
A
Tale of Greed
The tale of Dr. Faust dates back to the late 15th
century. It tells of a scholarly German gentleman who was well versed in
astrology, the Holy Scriptures, and the science of medicine, but who also dabbled
in sorcery, prophesy and necromancy (predicting the future by communicating
with the dead). Born of God-fearing parents, Faust led a good but
ordinary life. In his latter years, driven by frustration, ambition and a
burning desire to get more out of life, Faust called upon his sorcery and
summoned the Devil to propose a pact.
In exchange for an opportunity to experience the
very best that life had to offer…wealth, luxury, pleasure, knowledge and wisdom…he was prepared to
sell his soul. The Devil, incarnate as Mephisto, was more than happy to
oblige, subject to three conditions. Firstly, Faust had to renounce his
Christian faith. Secondly, the pact had to be signed in Faust’s own blood.
Thirdly, at the expiration of twenty-four years, Faust had to deliver up his
body and soul to the devil.
Faust agreed to these terms without hesitation, and began
to live a life he had previously only been able to conjure up in his wildest
dreams. Fame and fortune followed him everywhere as he travelled throughout
Renaissance Europe. Stories circulated about his magical powers. Royal courts
vied for his presence and the chance to hear his prophecies and horoscopes
which were always true. An endless supply of beautiful women indulged him in
every sensual pleasure and perversion. Faust’s life wanted for nothing as he
lived a life of excess.
And yet, the years slipped by too quickly. Faust
began to sink into depression as the realization dawned that the agreed
twenty-four years were almost up, and soon the Devil would be coming to claim
his soul.
In the middle of the night on the last day of the
twenty-fourth year, startled neighbours were awakened by the sounds of a
ferocious storm. Fright gave way to terror as horrendous screams and hellish noises
exploded from Faust’s bedroom.
At daybreak, when terrified neighbours summoned up
enough courage to venture into Faust’s bedroom, they found a scene of horror
and devastation. His unrecognizable remains were scattered all around the blood
soaked room.
A
Modern Day Faustian Pact?
“Households leave door open to devilish risk.”
Ignorance
won’t be bliss if the financial system falters.
“Have households in Australia and other advanced economies unwittingly
entered into a Faustian pact with the financial sector? It takes a German
brought up on Goethe (author of Faust:
Eine Tragodie) to think of the evolution of the global financial system
this way.
The German in question
is Gerd Hausler, who knows a thing or two about financial markets. For the past
five years he has been head of the International Monetary Fund’s international
markets department….had stints at the Bundesbank and the Bank for International
Settlements…on advisory panels for…German stock exchange and the New York Fed…
(etc). You get the picture; Gerd has been around.
His interest is in
the way financial risk is being increasingly shifted from banks, other
financial institutions, companies and governments on to household balance
sheets. He calls households “the shock absorber of last resort” for the
financial system.
Banks, once
thought of as institutions that made money from assuming risk, these days pass
risk on to other financial institutions and households.
The problem, he
explains, is that the generally low level of financial literacy of
households means that they know very little about appropriate risk premiums…And
this is where the Faustian pact comes in.
“The household
sector is invited to participate in the search for yield, to enhance their
returns in whatever way. But the ‘dark side’ of such a pact is to be
included in the risk sharing as well; visible only when asset prices start to
fall significantly and Mephisto asks for his side of the bargain to be
fulfilled.”
In Faust’s case he was to surrender his soul
to the Devil. In the case of households it is their wealth and retirement
income prospects that might suddenly go to hell.”
Alan Wood, The AUSTRALIAN, April 15-16,2006.
Other Unholy alliances
Arthur
Levitt, the longest serving Securities and Exchange Commission chairman in
history, had this to say in his best-seller “Take on the Street” (Random
House 2002):
“The web of dysfunctional relationships among analysts, brokers, and
corporations would grow increasingly worse… supposedly independent accounting
firms were working hand in glove with corporate clients to water down
accounting standards…they were willing accomplices – helping companies disguise
the true story behind the numbers.
This unholy alliance was producing revenue for the analyst’s
firm but hardly any benefits for most of their clients.”
Doug Wakefield (www.bestmindsinc.com ) believes Levitt
speaks “plainly of the culture that surrounds Wall Street. In a word:
GREED…” and agrees “with much of Levitt’s assessment of the
incestuous relationships that exist throughout much of Wall Street.
If
you are concerned by the greed, lack of transparency, and lack of regard for
retail investors in the stock market, you are likely to be troubled by the
recklessness that exists in our banking system today.”
Meanwhile, Eric Englund (www.lewrockwell.com , publisher of The
Hyperinflation Survival Guide) believes “central banking is at the
centre of the boom-bust cycle… The hyperreality conjured up by the Federal
Reserve’s relentless inflation of the money supply is characterized by a
populace which believes that a permanent plateau of prosperity has been
attained… people have absolutely no fear of debt.”
Seems that more than a few people in today’s
financial world may have entered into their own little pact with the devil.
“Cash is Trash” and “The Dash to Trash”
“It is sad but true—cash is trash!
If you want to protect your family’s wealth…you must get rid of your cash and
invest in appropriate assets… commodities and equities of emerging markets will
outperform…” writes Puru Saxena (Editor, Money Matters).
Saxena’s
belief that we’re about to be swamped by a devastating hyperinflation is in
accord with Jim Puplava (www.financialsense.com) who warns “The Inflation Juggernaut: Be
Prepared!”
On the other hand, James Montier, Director of Global
Strategy at Dresdner Kleinwort Wasserstein (an investment bank based in
London & Frankfurt) is uneasy because “Investors seem to be displaying
signs of pure fearlessness…they seem more like Wile E. Coyote, running in thin
air before looking down and realizing they have nothing to support them, and
succumbing to the inevitable gravity check.”
In his article The Dash to Trash” Montier
worries that investors are blindly pursuing junk in “an obsession with
return without any regard for risk…greed is good and junk is the best way to
go.”
The
Dark Side
The Federal Reserve Bank of Atlanta recently held a
two day conference to discuss the recent stupendous growth of hedge funds and
their increasing integration and influence on the world financial system. One
of the guest speakers, Nigel Jenkinson (Bank of England director) had this to
say:
“There
is a dark side connected to financial integration. If shocks are large enough,
the
financial system becomes a risk-transmitter rather than a risk-disburser.”
Also voicing his concern was Bob Eisenbeis (Research
Director Atlanta Fed) who expressed “a need to be concerned about the
appropriateness of such investments (hedge funds) for pension funds, which are
aggregating funds for investors (retirees) who could not individually invest in
such unregulated investments.”
Meanwhile, the spring gathering in Washington of the
International Monetary Fund and key world financial ministers came up with a
few concerns of their own. Talking about the “global economic imbalances” that
threatened to unleash a devastating meltdown if left unchecked, Raghuram Rajan
(IMF Chief Economist) gave his gloomy assessment:
“Far too little is being done far too late.”
Mr Rajan went on to warn that while the permabulls
of Wall Street and the financial world dismissed these fears and argued
that the risks were overstated;
“…the
optimists have to be right every day,
while
the pessimists need to be right only once.”
All the
best, Joe.
Disclaimer: This newsletter is written for educational purposes only. It
should not be construed as advice to buy, hold or sell any financial instrument
whatsoever. The author is merely expressing his own personal opinion and will
not assume any responsibility whatsoever for the actions of the reader. Always
consult a licensed investment professional before making any investment
decision.