Friday, February 20, 2009

Lessons From a Billionaire - Goldsmith's 'The Trap'.

Have you ever read the book 'The Trap' by Sir James Goldsmith? I read it when it first came out and the follow up 'The Response'. The books are a little hazy in my mind so I have ordered both from Amazon and will be scouring through them for prophetic nuggets relevant to our current times.

Goldsmith was as famous for his personal life as well as his business life. His first wife, whom he married when 20, was the Bolivian heiress Maria Isabel Patiño, 18-year-old daughter of tin magnate Antenor Patiño and the Duchess of Durcal, of the Spanish royal family.

When Goldsmith proposed the marriage to Antenor Patiño, Patiño is alleged to have said, "We are not in the habit of marrying Jews to which Goldsmith is reported to have replied, "Well, I am not in the habit of marrying [Red] Indians". This story if true is typical of Goldsmith's humour and his forthright views.

He was also attributed with the quote "When you marry your mistress, you create a job vacancy" although the French actor Sacha Guitry is believed to be the first to coin the phrase.

In business he was characterised as 'The Lucky Gambler' after predicting the 87 crash but his best years, in my opinion were those later in life.

It is easy for billionaires to criticise the very system that allowed them to be so wealthy, but Goldsmith, influenced by his brother Teddy, became an ardent environmentalist before turning his intellect on the problems with free trade and globalisation.

Mocked at the time for being 'old fashioned' and 'blinkered' some of his words now look prophetic and those who dismissed him look... well... pathetic.

On his dislike of the free trade agreements he pointed out that although consumers in the developed world will have access to cheaper imported goods, the real cost to them "will be that they will lose their jobs, get paid less for their work, and have to face higher taxes to cover the social cost of increased unemployment."

Does that ring any bells with anyone?

This 'transfer of wealth' was highlighted by a report of the US-based National Intelligence Council 2025 Project, published in December 2008, which foresees “the unprecedented transfer of wealth roughly from West to East:”

The whole international system, the report says, “as constructed following WWII – will be revolutionized,” according to the council. “Not only will new players – Brazil, Russia, India and China (BRICs) – have a seat at the international high table, they will bring new stakes and rules of the game.”

India and China have crossed the US$1 trillion-plus gross domestic product, the latter far exceeding the former. Indian GDP grew at 9.2 percent, close to double digits, during 2007 according to the IMF. China did even better at 11.4%. They lend money to the US government.

Both achieved all this with export-led growth, not by catering to their own population. India achieved high growth by exporting service sector products like IT and IT enabled services. China exported small-scale and large-scale industrial products – steel, garments, toys, milk products, electronic products, etc.

We all know why these economies were able to increase the wealth of their countries and experience it personally when we are routed to an Indian call center after calling our local bank.

As Goldsmith said in the second section of the book;

"The New Utopia GATT and Global Free Trade' is a powerful attack on... ..liberal/capitalist dogmas.

Goldsmith pointedly states "...forty-seven Vietnamese or forty-seven Filipinos can be employed for the cost of one person in a developed country like France".

"The adoption of global free trade would therefore be utterly disastrous for the middle- and working-classes of the West, as the transnational corporations simply move their production operations offshore. But the poor of the less-developed world would not benefit much, either.."

" of the characteristics of developing countries is that a small handful of people controls the overwhelming majority of the nation's resources. It is these people ... who assemble the cheap labour which is used to manufacture products for the developed world. Thus, it is the poor in the rich countries who will subsidize the rich in the poor countries".

Goldsmith's assertion of the 'transfer of wealth' is one which economists brush off. They tell us that the increased productivity of nations whose companies are taking advantage of the lower wages paid to emerging countries workforces increases the standard of living of people in that nation.

I must admit, over the last 10 years I have watched as all of Goldsmith’s assertions on free trade were swepped aside by increasing stock market, low unemployment and affordable quality goods. Unfortunately, we find out now, with the benefit of hindsight, that our economies were not enriched by free trade per se, but by the debt to fund it.

The best example of Goldsmith's views was the oil spike. Newspapers were happily quoting Bonne Pickens and his mantra of the US 'exporting' $750 billion a year from the purchase of oil. It is nothing new, of course, but it the easiest way of explaining the tramsport of cash from West to East.

I will say that I do not profess to be an economist, merely and observer of the current crisis. Goldsmith was not a learned scholar, nor a modern day Nostradamus, but a practiced businessman who made billions and therefore had certain, some would say skewed, views of the world. But the points that Goldsmith made, which at the time seemed backward looking, have come to haunt us as we look at the current crisis and should not be dismissed a the musings of a rich socialite.

It is said that a wise man profits by the experience of others, a man with common sense profits by his own experience, and a fool profits by neither.

Many in our industry are looking like fools right now and we must look to those who have criticised our system in the past to see how we can mend it for the future.

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