“Is he late?”
“Not any more than the others.”
“We took the bus. It took over an hour to get here.”
“Hey…when there are strikes, you’re lucky to get a bus at all. Beautiful day though, isn’t it?”
Thus went a short interchange at the door of my son’s school this morning. Today, a general strike of “unlimited duration” began in France. During rush hour this morning, the city’s streets came to a veritable standstill. My son used the extra time on the bus to grab some extra zzz’s before his arduous pre-school day began in earnest…while I pondered the French national pastime.
For the American expat, strikes are an amusing carbuncle on the fesses of life in France.
French Strikes: Armored Cars for Target Practice
In the spring of 2000, for example, not long after we set up shop here in the Daily Reckoning HQ in Paris, the armored-car drivers union (the French version of specie-carrying Brinks trucks, that is) declared an “unlimited” strike. Apparently, Basque and Breton separatists, in two different regions of the country, had managed to get their hands on a supply of shoulder-held rockets. After which they began using armored cars for target practice. Sure, some 30% of the money they carried would get burned up in the aftermath…but the other 70% allowed the terrorists, among other things, to buy more shoulder-held rockets.
Not too keen on the practice, the armored-car drivers wanted the government to provide them with hazardous duty pay – and were prepared to choke the supply of “fric” to the nation’s capital in order to get it. They went on strike for ten days. By the end of the third day or so, there wasn’t an ATM in the city dispensing paper money.
Imagine, if you will, all the liquid cash drying up in New York City or London. It’s inconceivable.
But Parisians took the event in stride. Many shops simply closed. The proprietors, like the rest of the city, whiled away the days in the city’s famed outdoor cafés…where you could only purchase a pitcher of red wine with a credit card. “Vive la grève!” they would say…
French Strikes: Swamping the Welfare State
We’re not bringing up the French passion for taking to the streets so readers can enjoy another snigger at their expense. The Frogs are plenty capable of offering snigger-bits on their own. No…we bring up the strikes this morning because they are the charming French response to an economic crisis about to sweep all of the Western world: the swamping of the welfare state.
As well-intentioned and brilliant as the idea may have appeared at its outset, the welfare state – the promise Western governments made to care for their citizens from cradle to grave – is fast running out of time…and money.
For the wine-addled observer, the details on the French strike are almost irrelevant. France, like the U.S., Great Britain, Japan, Germany, Italy, Portugal and (insert name of giant welfare state here) has what’s called a “pay-as- you-go” pension system. Retirees drawing from the system are paid off by workers still on the job. There’s no investment, no financing, no logic…just a massive transfer of wealth.
In an effort to prop up this Ponzi scheme as long as possible, the government here in France has proposed mid- stream rule changes similar to those passed in the U.S. in 1997. They want to slightly increase the amount of social security taken from each worker’s paycheck and substantially lengthen the amount of time workers will have to continue to toil before they begin getting somebody else’s money back. Those going on strike are okay with the tax increase; they just don’t want to work any longer than they already have to…”Vive la grève!”
Bureaucrats, quants, pension fund managers, retirees and workers’ unions around the West are in a death struggle with the hard math of demography. And it’s not just that baby boomers getting older. After the baby boom generation made their way from pampers to blue jeans, plunging birth rates became the norm in many industrialized countries.
French Strikes: Japan the Trendsetter
In Japan, always the trendsetter nation, abortion was legalized in 1954 – nearly 20 years before Roe v. Wade. The event roughly coincided with the introduction of the “pill”…and the birth rate has never been the same since. As you may have read on occasion in the Daily Reckoning, we’ve found ample evidence to suggest that the bubble in Japan rode the crest of the boomers as they lived through their highest “getting and spending” years…and the economy has subsequently suffered a decade of malaise, as these getters and spenders began to get and spend less and less.
The much smaller generation of younger “getters and spenders” following behind the boomers hasn’t been large enough to make up the difference. Likewise, pensions have been decimated.
“Ever been to Florida?” asks Peter Peterson in his book, Gray Dawn. The percentage of the population residing in Florida aged 65 and over is about 19%. By the year 2023, then entire United States will reach this benchmark. For France and the UK, the date arrives a little sooner: in 2016. Japan is all but there…they’ll cross the 19% benchmark in 2005.
Italy IS there already.
French Strikes: Do the Demographics
“When we went to Italy [on our world tour],” Jim Rogers told us in a recent conversation, “there were restaurants where everyone was over 50. As a result of that observation on the ground, and if one had NOT done one’s homework and done the demographics, it would have slapped you in the face.”
While researching our own book (“Financial Reckoning Day” John Wiley & Sons – due out in September) we noticed that throughout history, large shifts in demographics have always had mutating effects on the societies striving to support them…just as we might expect from the aging of the West.
“So what should be done about it?” the politically disaffected will invariably ask. In France, this morning, the response is to begin quibbling over the details. And, of course, take to the streets.
Our cheerful response: do nothing.
The “pay-as-you-go” system was a bad idea in the first place. The faulty mechanics of it are merely being exposed by an historical trend bigger than any political will. The world changes. Which of those doing the paying and going right now really expects to be getting and enjoying some time in the future, anyway?
The Daily Reckoning
June 3, 2003
P.S. During our conversation, Jimmy Rogers also talked about discovering an overwhelming number of girls in ratio to the number of boys while traveling through Korea.
“Right now,” Rogers told us, “for every 100 14-year old girls, there are 120 14-year old boys. The status of women has been horrible in Asia for centuries. They’ve been third-class citizens. That’s going to change.
“And it’s not just Korea. It’s all over Asia. And it’s not just one year. Last year in China, there were 117 boys born for every 100 girls. When those girls become 22-year old women, and realize they can have any man they want, it’s going to change their world. It’s going to change education, politics, the professions…everything.”
What did Rogers “do about it” when he made his discovery? He invested in all the Korean companies that make birth control pills.
Why does anything ever have to end?
We have no answer, dear reader. But everything does. Everything on this sorry ball disappears. Every leaf turns brown and rots. Every amoeba, statue, bowling ball, kangaroo, season and love affair gives way eventually. Even natural stone wears away and turns to dirt.
And you and I, too, dear reader. We have a rendezvous with dirt, too. We will slide into heaven or hell like a congressman in a mudslide – that is, with neither grace nor dignity. May the jolly saints greet us with loud huzzahs and a shot of whiskey!
The end we are writing about today, however, is not our own; rather, it is the conclusion of the good times we have enjoyed over the last 30 years – during the Great Boom of the Dollar Standard.
The division of labor was simple: foreigners would make goods, Americans would buy them. Americans would pay with dollars…and foreigners would lend them back.
It was easy work, exporting trillions of dollars; the foreigners were happy to take as many as we shipped. They set up factories and schlepped far into the night in order to make geegaws that they could trade for them. Global trade flourished…and everybody seemed better off for it.
“We are in a country that is buying more from the rest of the world than we’re selling, and we’re doing it on a big scale,” Warren Buffett remarked on May 21.
“Any other country in the world that did that on that scale would have seen greater currency depreciation already,” he added. “We have such a strong currency historically that there’s been a delayed effect. But it’s started to happen in the last year, and unless the underlying conditions change, it’s going to continue.”
Before 1971, countries had to settle their current account imbalances in gold. The amount of money in the world was limited by how fast miners could dig the stuff out of the ground. The Dollar Standard had a near-miraculous effect. All of a sudden, there was almost no restraint on the world’s money supply. The central banks sold their gold and piled up dollars. It was boomtime.
Charles de Gaulle saw the final act, even before the show had started; foreigners wouldn’t take the dollar at par forever. A Dollar Standard, he said in the early ’60s, would allow the U.S. to pay its bills in money of any value it chose.
Forty years later, it looks like the world’s investors may be catching on too – the Great Boom may be over. Germany has edged into recession. Italy, too. Consumer prices fell 0.2% in Germany in April-May. Imports from China – driving down prices – are increasing at a 62% annual rate. Japan…well, Japan is always in recession, isn’t it?
Germany is 30% of the European economy, prompting Stephen Roach to conclude: “Europe is on the brink of economic failure.”
Here in the U.S., yesterday brought news that it takes longer to find a new job than at any time in the last 20 years. And the Financial Times revealed the little secret that our own Kurt Richebächer has been writing about for years: the productivity numbers that lift Alan Greenspan’s spirits are phony. The numbers he relies upon are gross numbers. The net figures, which are reduced by depreciation, show no productivity miracle – not even close.
And so it was all a lie, after all. Every vanity of the New Era has now been destroyed. No eternal bull market on Wall Street. No faster GDP growth. No peace dividend. No extra payoff from new technology. No greater productivity. No nothing.
It is all still the same. Everything comes to an end. Even the big dollar boom. For now, the ungrateful foreigners are growing chary of the dollar.
Eric, the latest news from Wall Street, please…
Eric Fry in New York…
– Like a tireless sherpa, Mr. Market has been shouldering the hopes and dreams of million bullish investors, as he has trudged – step by step – from the depths of Dow 7,500 to the heights of Dow 9,000. Yesterday, however, our noble sherpa started to show a little strain…perhaps it was the altitude.
– Whatever the cause, the Dow’s brisk 150-point morning rally, which lifted the blue chips to 9,003, faded to a gain of only 47 points by the closing bell, depositing the Dow at 8,898. Likewise, the Nasdaq’s early 25-point rally exhausted itself to become a 5-point loss. The tech-laden index finished the day at 1,591.
– Government bonds dropped for the fourth trading session in five, as crude oil surged back above $30 per barrel. The rising price of crude oil is no surprise to Outstanding Investments editor, John Myers, who has been predicting for weeks that the swift conclusion of the Iraqi war would not produce a swift conclusion to the bull market in oil. To the contrary, as Myers predicted, crude oil and natural gas prices continue to march higher. Yesterday, crude for July delivery jumped $1.15 to $30.71 a barrel. July natural gas soared 16.4 cents to $6.415 per million British thermal units.
– The ancients used to consider soaring energy prices a harbinger of inflation. But in today’s sophisticated, fully hedged world, runaway oil prices happily coexist with widespread deflation-phobia.
– Yesterday afternoon’s mini-selloff in the stock market notwithstanding, evidence of investor exuberance is plentiful. Unfortunately, an exuberant investor is often a wrong-footed investor. In other words, investors tend to become giddily optimistic, immediately prior to steep selloffs. If past is prologue, the bullish contingent of the lumpeninvestoriat may have cause to be nervous.
– According to the latest survey of the American Association of Individual Investors (AAII), bullish sentiment is rampant. 62.9% of the individual investors surveyed characterize themselves as bullish, versus a mere 14.3% who say they are bearish.
– Ominously, this is the highest bullish reading in the AAII survey since March 2000, a month that will live in infamy. For those folks who may be new to this investing stuff, on March 10th, 2000 the Nasdaq Composite Index reached its all-time high of 5132.52 – a number that is a mere 222% above current levels. Or, looked at from a glass- half-full perspective, an investor who had purchased a representative basket of Nasdaq stocks on March 10, 2000 would require ONLY seven years of 15% annual gains to return to break-even.
– Conspicuously, homebuilding stocks failed to participate in yesterday morning’s rally, and also led the way down when the stock market faltered in the afternoon. We would not read too much into one day’s trading action, except to observe that homebuilding stocks are probably due for a rest.
– “There doesn’t have to be a bubble in the housing market for a dangerous speculative meltdown to develop in homebuilding stocks,” asserts Barron’s Michael Santoli.
– “They’re becoming increasingly vulnerable to expectations that might not be met for continued growth…One hedge-fund manager, who claims to have placed some short bets on the group just last week, points out that earnings for some of these companies are calculated based on the cost of land acquired, in many cases, years ago, at comparatively cheap prices. This makes margins look better. Meanwhile, they continue to acquire land and small developers from sellers who are well aware of rising real-estate values. So, costs are rising. Inventories of homes at some companies are beginning to rise, a potential sign of slower customer uptake. While interest rates are quite low, that’s exactly why they can’t easily fall much farther to spur more demand…Some day, these arguments will probably matter quite a lot to investors. But who knows when?”
– True enough, but one item that might matter fairly soon to the buyers of homebuilding stocks is the nation’s troubling (un)employment trend. Unemployed and underemployed Americans buy far fewer homes and those who are drawing a steady paycheck.
– Tomorrow, we’ll take a brief tour through Unemployment Land to see how the nation’s job market is looking…and to gauge how confident – or nervous – the nation’s homebuilders ought to be.
William Bonner, still in Baltimore…
*** “The world really has changed,” colleague Dan Denning said over dinner last night. “Of course, America has to act differently…the challenges are different.”
We are not sure the world has changed. But America is becoming a different place.
“I’ve been here for 10 years,” said a French friend. “For the first time, my wife and I feel out of place…we may head back to Europe…”
“I’ve been visiting America for years and years,” confided another friend from Australia. “On my last trip, a few weeks ago, the place seemed different. Americans seem so fearful…”
What, we have been striving to remember, was it like before…before 9/11, for example? To that end, we’ve assembled a series of essays exploring the very idea of America.