Key points

• Capitalism is like democracy – not perfect but the best economic system ever devised

• Capitalism has delivered great wealth but also dangerous financial crises

• Financial crises might weaken or destroy capitalism – ‘strangling the golden goose’

• We need more sensible regulation• Individuals need to play the ups and downs• Now meet the heroes and villians of capitalism

Adam Smith – capitalism’s philosopher

Charles MacKay• His famous book: Memoirs of Extraordinary

Popular Delusions and the Madness of Crowds.

• The Tulipomania, Holland, 1636.• The Mississippi Bubble, France, 1720• The South Sea Bubble, England, 1720

• ‘Nobody seemed to imagine that the nation itself was as cupable as the South-Sea company. Nobody blamed the credulity and avarice of the people, - the degrading lust of gain, which had swallowed up every nobler quality of the national character, or the infatuation which had made the multitude run their heads with such frantic eagerness into the net held out to them by scheming projectors.’

John Law• The inventor of paper money, created the

Mississippi Bubble, France 1720, which was part of the destruction of the French Empire.

Sir John Blunt

• Orchestrated the South Sea Bubble, London, 1720.

Duke of Wellington, Battle of Waterloo, 1815

• It was damned close run thing, but England defeated France at the battle of Waterloo, with help from the Prussians.

• Britain became the global superpower.

Nathan Rothschild

• Helped fund Wellington’s campaign, then when the war ended converted gold to British bonds and made a financial killing.

• Rothschild family cracked the code to create and maintain intergenerational wealth.

The Age of Innovation, 1816 – 1914

• Stevenson’s Rocket, new inventions, new industries, new lands, all controlled by the Bank of England and the Gold Standard.

US & UK Share prices 1800 to 1914

Marvellous Melbourne’s Astonishing Property boom and bust

• Gold discovered in 1851; massive development boom, land boom of heroic proportion, deep depression followed.

• Big question: is 1850 equivalent to 1980?Melbourne Property Prices 1874 to 1909

Theobald von Bethmann-Hollweg

• Described WWI was ‘a leap in the dark, and a roll of the iron dice’.

John Maynard Keynes• Economic Consequences of the Peace• The General Theory of Employment, Interest and Money

Charles Mitchell – his role in the Great Depression

Sir Winston Churchill

• Rescued modern capitalism in the final battle for Europe. The two World Wars bankrupted the UK, while establishing the USA as the new global superpower.

Sir Winston Churchill• The USA insisted after WWII that the US dollar become the global currency. But the USA

has a mixed record as an economic manager, and its role is being challenged by China.

President Lyndon Johnson• Fought wars on Communism in Vietnam and on Poverty in the USA.• Most responsible for great inflation of the 1970s

Milton Friedman

• ‘Inflation is always an everywhere a monetary phenomenon’.

US Fed Chairman Paul Volcker

• Slayed the dragon of inflation in USA in 1979 – rest of capitalist world followed in due course

Asian miracles – and the inevitable asset busts• Plus - Asian

Crisis 1998• Russian Crisis• LTCM Crisis

Western Witchcraft – the world wide web …

• ... and a reprise of the Age of Innovation ...• ... but where was the Bank of England?

The US exports asset bubbles to the world

US Fed Chief Alan Greenspan

Do not fight asset bubbles; but respond to asset busts by cutting interest rates almost to zero

US Fed Chief Ben Bernanke

• Follows Mr. Greenspan ... Seeking help

The legacy of Messrs Greenspan and Bernanke

• ... and it ain’t over yet.

Messages – for governments and central banks

• We need less discretionary economic policies• Rules based, not ‘inspired’ acts of discretion• Perhaps a modern version of the Gold

Standard• China has endorsed such a change – in conflict

with USA• Fiscal policy needs reform – not panic reaction• Bail out policy needs clear rules also

Messages for individuals and families

• Do you wish to build and conserve wealth?• Study the history of boom & bust• Take an intergenerational view – someone in

each generation has to become expert• Be prepared to play the big swings in asset

prices