V-E Day... And The Euro
“How do you say `sell short’ in Esperanto,” I asked in one of these letters last year. At the time, the euro had recently been introduced. People expected that it would give the dollar a run for its money.
Economists argue about the euro’s decline. Paul Krugman says it is “just one of those things markets do now and then.” Jude Wanniski believes the market is making a decisive judgement on European economic policies.
Whatever the reason, so far, the dollar has been winning the race with the euro — without even breaking a sweat.
Mr. Mining came up to me after church on Sunday. He inquired once again about his wartime buddy, Jack McDonald from Los Angeles. I told him that we had tried a few research programs on the Internet, but so far had not found his friend.
Of course, Mr. McDonald may be dead.
A lot has happened since 1941. A soldier in Rabat, Morocco, where he met Mr. Mining who was with the Free French Forces, Mr. McDonald has had plenty of opportunities to die since then. He might have gone with Patton across North Africa, and then to Sicily…and perhaps up the Italian peninsula.
Or he could have been called upon for the landings at Normandy on D-Day. Perhaps there he lost not his laptop computer as I did, but his life. I should have looked for his name on the list of the dead…but did not think about it. And then…there were a lot of crosses marked “Here Lies a Soldier Known Only to God.”
Mr. Mining and Mr. McDonald were part of an extraordinary generation. Born after WWI, they experienced the Crash on Wall Street, when the “hurdle rate” was suddenly lifted to such a level that almost nothing could clear it. Economic activity nearly came to a halt. In the Great Depression, nearly one out of every three workers was out of a job. Then there were the big technological advances, too — the spread of electrification and the telephone, the interstate highway system, radio, television, air- conditioning. What an extraordinary time to be alive.
But the biggest event of their lives was WWII. Mechanization and the spread of socialist ideology seemed to make politics and violence a paying proposition — at first. Politics increased everywhere. Even in the United States and Britain, tax rates went from about 2% to over 60%.
But the threat of violence against taxpayers was nothing compared to the actual violence of the socialist states.
“Fascism,” said Mussolini, speaking for the whole genus of malignant socialist ideologies, “is opposed to Classical Liberalism…Fascism is for liberty. And for the only liberty which can be a real thing, the liberty of the State and of the individual within the State. Therefore, for the Fascist, everything is in the State, and nothing human or spiritual exists, much less has value, outside the State. Fascism…the synthesis and unity of all values, interprets, develops and gives strength to the whole life of the people.” — in the Italian Encyclopedia of 1932.
Meeting this threat was no easy or sure thing. But Mr. Mining, Mr. McDonald and millions of others rose to the challenge. They did what they had to do. And they succeeded. Even today, the episode stands out in their lives — not necessarily as something great or good or enjoyable. Still, it must be hard to forget and impossible to ignore.
People reacted to the peace in different ways. After May 8, most people in Europe were probably eager to put the war behind them and get on with their lives. Guy Sajer’s book, “Forgotten Soldier,” tells how the author, a German soldier, surrendered to American forces at the end of the war. He had fought on the Eastern Front, where prisoners were as good as dead men, and expected to be shot. Instead, within days he was a free man — back at home and ready to resume as normal a life as was possible.
On the other hand, a book by Nevil Shute, I believe it is called “The Breaking Wave,” describes a different effect. The war was such a Grand Enterprise that nothing subsequently ever measured up. Compared to the Battle of the Bulge or Iwo Jima…former soldiers just couldn’t get interested in stocking the shelves of Des Moines or harvesting the potatoes of Idaho.
But the reaction of European politicians was nearly uniform. Led by Jean Monnet, they longed for a New Europe — one where such wars would never happen again. They decided that the way to do so was to increase the level of cooperation and trade between the European states and erase the national barriers between constituent countries.
Unfortunately, they misunderstood what the war was all about. In Cold War Europe, it was widely believed that the war was the fault of the Germans…and of a “right wing,” reactionary, nationalistic ideology. It was almost completely forgotten that both Germany and Italy were socialist countries — and that it was socialism that freed them from the normal constraints of bourgeois, Classical, Western Liberal societies.
So, in reconstructing their countries after the war, politicians were happy to put socialist measures back in place, leaving out the nationalism. Even today, when a Jean-Marie Le Pen or Joerg Haider comes along — with a message that is deemed “nationalistic” by the media — it is considered a threat to the security of Europe.
But socialism is still OK…at least a moderate form of socialism “with a human face.”
The euro is the currency of the New Europe. I have styled it the “Esperanto currency,” after the ersatz language invented by Dr. Zamenhof in the late 1800s. Like the made-up language, the euro was expected to help erase the barriers between European nations and aid the cause of peace. In fact, European politicians often said they considered the euro essential to maintaining peace in Europe.
If that is so, the peace of Europe may be in jeopardy. Because the euro has dropped about a quarter of its value since I wrote about it less than a year ago.
The euro, like Esperanto, has been something new. The world had never before seen a currency that was backed by neither gold nor silver…nor by the power of a sovereign state. The euro is backed only by treaty. And in a pinch, the treaty could be revoked, rescinded or simply abandoned. Already voters in Holland and Denmark are threatening to walk away from the euro treaty. Voters in the United Kingdom — which has not yet accepted the euro — threaten never to do so.
Esperanto peaked out a long time ago. There are still people who speak the language. But it is disappearing.
Will the same happen to the euro? Of course, the euro is a sham. It has no inherent value. And it has no guaranteed source of support. But it has one thing going for it — the competition. The dollar.
While the euro is structurally fragile…the dollar has been weakened, too. It is held aloft by the same New Era magic that supports the Nasdaq. Each day, including holidays, the U.S. trade deficit totes up another $1 billion. It would not take much to break the spell and send the dollar collapsing.
The euro in a contest with the dollar is like a beauty pageant in which one of the contestants has a glandular disorder…and the other just eats too much.
How do you say, “sell them both short” in Esperanto?
Paris, France May 8, 2000
*** “We are probably in a bear market,” said George Soros over the weekend. “Only we don’t know it yet.”
*** Investors Friday didn’t seem to be aware. They bid up both the Dow and the Nasdaq — in market action that was perverse and inexplicable.
*** The employment numbers were strong. The figures showed unemployment dipping to 3.9%. This is good news for the economy…but it should have been bad news for the stock market.
*** Strong employment means pressure on labor rates, which means — at least by implication — inflation. And it should also mean that the Fed is more likely to increase rates by 50 basis points next week.
*** Interest rates are, you will recall, society’s “hurdle” — keeping greed from getting out of control. The higher the rate, the tougher it is to clear the hurdle — which is to say, the harder it is to find investments that will do better than the “risk-free” T- bond rate.
*** But this didn’t seem to bother investors on Friday. After falling at first, the market turned around. The Dow rose 165 points. The Nasdaq rose 96. Did it make any sense? Who knows? But markets don’t have to make sense.
*** Taking the week as a whole, the Dow was down 1.49%. The Nasdaq was down 2.25%. But the Russell 2,000 was up 1.3%.
*** The number of advancing stocks was about equal to the number of declining ones. And the number of new highs was not far from the number of new lows. So it was a draw.
*** Gold fell $1.10 (June contracts). Silver fell slightly too — to $5.05.
*** I have been drawing various parallels between investment manias and episodes of apparent insanity in politics. WWII, whose end…in Europe…we celebrate today, was such an episode. Who gained from WWII? It was an appalling disaster for nearly everyone. People were poorer…and deader…after it than they were before.
*** Last week’s insight was worth polishing, I thought: It was the realization that there is the capacity for greed and violence within us all the time. These qualities flare up — sometimes insanely — when the inhibitions against them are removed. In WWII, socialism, in both Russia and Germany, destroyed normal political and social constraints.
*** On Wall Street in the `90s, “Easy Al” Greenspan, the Japanese, the Light-Headed Brigade of investors/day traders and the credit markets removed the constraints against exaggerated greed. The hurdle rate for TNT stocks was reduced to practically zero — and lower. Entrepreneurs could start up some hopeless dot-com business and get all the capital they ever wanted. All of a sudden, grasping shortsighted greed paid off.
*** I had to rewrite this message. The first time, for some unexplained reason, it disappeared. I received the “I Love You!” message in triplicate on Thursday. I opened the message, but not the accompanying file. Could the virus be causing problems? Maybe the sender didn’t love me as much as I thought.
*** “It’s an easy way to save the rain forest,” said another strange e-mail message. “Just click…Each click generates a donation, paid by advertising sponsors…” It probably generates a few bucks in market cap for someone, too.
*** This is another holiday weekend in France. The roads out of Paris were clogged until nearly midnight on Friday as everyone who could made their escape from the city.
*** Yesterday we went for tea at a nearby chateau with a very “old money” family. Well, it looked more like the money was not old but extinct. And had been for many years. The chateau was in bad shape…and getting worse. And poor Clothilde and Jean Francois de H. could do nothing about it. I got the impression that the whole place was a terrible burden. But they were trapped by it. It had been in the family for many generations and darned if they were going to give it up. So they live in poverty that becomes less genteel with every passing day. Everything needs repair.