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John Taylor Comments On The End Of Bismarkism, Says Greece Is Doomed, And The Euro Will Not Replace Dollar
On one hand you have the Greek finance minister uttering the most self-serving statement of the year, saying Greek bonds are no longer something to fear (even as Greek industrial production falls 8.6% on expectations of -5.7%), on the other you have John Taylor saying that "unless a miracle takes place, the Greek situation will deteriorate and other countries will follow in the next few years." That's fine: G-Pap is currently taking advanced transmogrification lessons as the local alchemy university - even miracle workers have to start somewhere.
Bismarck’s Strategy Has Reached Its Limit
September 9, 2010
By John R. Taylor, Jr.
Chief Investment Officer, F/X Concepts
In the 1880’s, Otto von Bismarck, Chancellor of Germany, instituted a series of revolutionary and very generous social reforms in a successful attempt to weaken the growing political appeal of the Social Democrats. His strategy was such a success that it not only allowed him to maintain control of the volatile German political landscape for a few more years, but also became the social welfare model for the rapidly democratizing Europe. By giving the rapidly growing working classes a far better deal that allowed them to receive a decent wage with retirement benefits and health care, Bismarck neutralized the powerful Socialist and Communist threat that looked as though it might force him from power.
Looking back at the development of the European democratic system, it is clear that Bismarck’s tactic, designed to take the wind out of the Social Democrats’ sails almost 130 years ago, laid the groundwork for several different more-or-less successful political systems that continue to operate throughout the continent today. What makes these systems different than that of the United States is the entrenched power of the European economic and social elite and the generous social benefits offered to those who (in US terms) have no economic or political power. The US system is its opposite: more open to economic and social outsiders, allowing for more dynamism within the power structure, but lacking a decent social safety net. Although the differences between the two democratic systems have blurred in the last few decades and can be overblown, the US still offers many fewer entitlements and more mobility while Europe offers substantial entitlements and much less social mobility.
From a long-term point of view, Europe’s system is threatened by two intertwined problems: many countries are unable to pay the future level of entitlements that the Bismarck strategy demands, and the pan-European structure created by the political and economic elite can only be maintained if the high level of entitlements and economic security promised by Bismarck is continued. The debt load of almost all member states and the expansion of the European Union to countries with lower standards of living are issues today, but the problems are much deeper and will continue to expand. Although statistics can be confusing and lead to incorrect conclusions, in this case the projections of future population growth and the current economic positions of the vast majority of the EU countries have such negative implications that it is hard to draw any positive scenarios for the Continent. If all Europe could take the lead of modern Germany as an export powerhouse, selling very high value-added products to the rest of the world and building up a tremendous global net-asset position, there might be a way to pay the entitlements when the dependency ratio closes in on 1.0 about 40 years from now. Or if Europe discovered a Saudi Arabian sized pool of oil under the Mediterranean, or, more likely, a rare earth play that allowed it to hold the dominant position that China does today, then these would work. The nationwide strikes in France yesterday, protesting the increase in the retirement age from 60 to 62, and the targeted ones in Greece this week, are symptoms of Europe’s more likely course – a rolling cut back in entitlements. As a 67 year-old American writing this evening (in overtime), I find it easy to say “just do it,” raise the retirement age and cut social benefits, but my knowledge of politics and societies tells me that the process will be very difficult and fraught with political struggle and turmoil. Unless a miracle takes place, the Greek situation will deteriorate and other countries will follow in the next few years. Although it is hard to forecast currency movements years into the future, one thing is obvious: the euro, as it is structured today, is not the currency to replace the dollar.
h/t Teddy KGB
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I always appreciate Taylor's perspective.
Thanks again, ZeroHedge.
:D
Taylor only made one mistake here:
"the US still offers many fewer entitlements and more mobility"
An accurate statement is that the US offers many fewer entitlements and USED TO off more mobility. Now we're simply like europe without the entitlements.
The only currency the Euro is going to replace is whichever one is currently atop the 'Recently expired fiat currencies' list.
NORWAY DOESN'T AGREE: http://noir.bloomberg.com/apps/news?pid=20601087&sid=aA4PCSlbwZWM&pos=1
Given their less than stellar investment performance, I would take such a move by the managers of a SWF as a strong sell signal.
I predict that Norwegian families will not be naming their newborns "Yngve" for at least a generation.
No, but the expression "To do a Yngve" may enter the common parlance, for example
"I had a really good feeling that a double-six would come up, so I did a Yngve and bet the kids' college fund on it."
Discussion on sovereign debt:
BNN.ca
Part 1
http://watch.bnn.ca/clip345386#clip345386
Part 2
http://watch.bnn.ca/clip345389#clip345389
(posted this yesterday, but threads die very quickly on ZH)If each state spoke different languages....the US would be a lot like Europe ...
Here is an acid test....
Fire dept. chief in CA makes $500,000....
Fire dept. chief in SC makes $50,000....
CA cries uncle because it is going broke....and wants to tax SC in order to pay for $500,000 CA fire chief....
SC rightfully objects....
Sound familiar ?????
Ft. Sumter bitchez?
I find the above interesting. I feel overwhelmed by excess of data and opinions though. What can you all tell me about that "short view" commentator on financial times? he says Greece will probably default, but not in the next two years thanks to the IMF. http://www.ft.com/cms/s/0/2918d9fe-baef-11df-9e1d-00144feab49a,s01=1.html
I think Europe is slightly better prepared than the USA to confront the challenges of decades of zero or negative growth and rapidly declining Energy Return On Investment.
Moreover Americans have seldom dealt with the kind of chaotic social confrontations that have, for good or for bad, been part of most European country's history for centuries on.
But America's great strength is its constitution. I think Europeans will continue to resist the creation of a United States of Europe and I think it is more likely than not that the United States of America will revert back to a much looser, constitutionally sound, federation than what it has morphed into today. So we'll see.
And I don't think the Euro was ever set to replace the Dollar anyway. I think sooner rather than later, we won't see the kind of free-floating Eurofiats and Dollarfiats as we have them today. That post Bretton-Woods era is just about to end.
All I know is that great challenges lie ahead of us in both continents. And I sincerely hope each one of you and your friends and families will be capable of making the best out of it.
Be prepared, buy Gold for yourself and your loved ones.
Interesting perspective on Europe. What strikes me is that Europeans are more sensible with respect to energy consumption than Americans. An individual American leaves a huge energy footprint compared to a European. You don't need a car to live in European cities, whereas even small American cities may require you to drive an hour round trip just to buy food. Americans practically live in their cars. Apartments in Europe are also smaller and more energy efficient, compared to the big sprawling houses of Americans. People talk about Americans having to change their lifestyle, but really, that amounts to a very long term proposition which will require shrinkage of cities, dwellings, more public transportation, less private, etc. My hunch is that forced poverty will be what eventually causes the change that is needed to adjust to a world with less energy and fewer resources in general.
Biz Markism:
http://www.youtube.com/watch?v=9aofoBrFNdg
Ahem.
To put things into perspective (and Taylor's perspective with a grain of salt), "The Economist" itself (not exactly a magazin known for its socialist tendencies) recently expounded on the myth of social mobility in the USA: http://aproposfrance-usa.blogspot.com/2010/04/myth-of-american-social-mo...
While it is true that a lot of countries in Europe have population growth problems, most of these issues may come from a lack of a social safety net, and not the reverse. Compare and contrast Germany, where women are traditionnaly relegated to "Kinder, Kirche, Kurche" (kids, and kitchen and church) and which has a very low fertility rate, and France, with robust and reasonable population growth, and numerous advantages offered to mothers.
Also, the real problem with the current crisis is (a) the stagnation of real wages in most of the developed world, courtesy of cheap chinese labor and (b) the staggering amount of debt that most people have contracted over the last few decades. In that respect, Europe and America may well be on an even keel, so to speak.
Actually, the Economist has taken a very pronounced turn to the left. I recently cancelled my subscription after reading the magazine for 20+ years.
They have been big supporters of Obama and AGW (two of the biggest socialist cons of the last century).
Paying people to have children is a fools game and no society can afford it. Certainly, a society in collapse (such as Russia for much of the last couple of decades, and frankly, still today only it is well hidden) does not produce many children. However, when a culture, such as the West (Europe and US) gets so focused on current pleasure that they have no interest in building the future, they quit having children, start taking on debt they can't repay, and demand current pleasures while leaving the bill for the future generations they could care less about.
This is Europe's and (to a lesser degree) the US's problem. Only when the hedonistic impulses of Western peoples are replaced with a ethos focused on building a better world through current sacrifice will you see the birthrate pick up and things start to improve.
The barbarians are at the gate (similar social trends were present in Rome, see C. Augustus's battle to get the Roman patricians to have children). Unless our society changes, the barbarians will take over. The future belongs to those that show up (Mark Steyn).
Socialism is a dead end and Europe is 1 step from hitting the wall. The US is 1 or 2 steps behind. We will either return to the attitudes of our past (frankly think Europe is too far gone, US probably so) or the Western world is doomed. Shame that, but everything dies. The future world will probably look a lot more like feudal Japan or the Mogul Empire than 20th century US or Europe. If you don't want that, the only hope is to fight for the future. Otherwise, the West is just waiting to die (or to be killed) by more energetic societies.
"However, when a culture, such as the West (Europe and US) gets so focused on current pleasure that they have no interest in building the future, they quit having children, start taking on debt they can't repay, and demand current pleasures while leaving the bill for the future generations they could care less about."
Cultures don't have children, humans do. And hopefully, Westerners aren't quiting reproduction, they are just reproducing slightly less than they used to.
"Only when the hedonistic impulses of Western peoples are replaced with a ethos focused on building a better world through current sacrifice will you see the birthrate pick up and things start to improve."
So if I understand you well, a world with, say, 12 billion people will necessarily be a better world than today?
Across countires and time, birthrates have tended to decrease with human development. Always have. Nothing to do with "hedonistic impulses".
"Unless our society changes, the barbarians will take over."
Pray tell, who are those barbarians?
It depends on who those people are and what they're doing, but yes, a world with 12 billion people working in a free market economy would produce shocking increases in quality of life.
Dear Mr. Taylor,
I am currently vacationing in Greece and while things are bad, I wouldn't say they are doomed. In fact, you wouldn't notice anything wrong if you were here as a tourist. Only when you to talk to locals, small business owners and pensioners do you realize the internal deflation going on. The problems in Greece right now are the same as every, namely businesses have no access to credit and demand has dropped off a cliff. The public sector is cutting everywhere and so is the private sector. Years of corruption, short-sighted policies have caught up to Greece. Same will happen elsewhere. But is Greece and Europe doomed? Hardly, they will eventually come out ahead in the long-run, but in the short-run, more pain is in store.
If anyone could put a happy face on a Depression Leo, you could.
I don't know, may be your relatives in Greece are affluent and part of the ruling elite and they are not horribly affected by the "austerity" measures. Take the time Leo, before you return, to walk through Athens not so fashionable neighbourhoods and I think you'll come back with a different opinion about what's really going on in Greece.
IMO, they are one strike gone wrong from serious civil unrest. Keep your eye on what happens in Greece this fall and winter Leo, your attitude may turn a lot more pessimistic.
The one thing that Greece has in common with other failed states is that the rich don't pay any taxes.
Only when you talk to locals and small business owners? Whom did you expect someone to ask about the situation? A Swedish tourist?
Geopolitical mumbo-jumbo aside, how can you write something so irresponsible?
apologies 4 double post
the strokes of this article are far far too broad.
The EUR is not a currency as much as a dilemma. A Post Bretton woods world is certainly in store but a big piece of that will be how China and other Asian surplus countries adjust and no one has a clue how that is going to shape up or what a plausible time frame will be.
A dilemma, since monetary policy for Germany and monetary policy for Greece never the twain shall meet, unless of course you establish one central governing authority, add cross border labor mobility which exists in name but not really in practice, etc. etc. etc. Europe has many merits but the current system of one currency for all seems better suited to a world when Hanoverian Kings ruled Britain and European royalty were one big happy, inbred family, then today. The masses have evolved even if perhaps, the ruling classes have not.
It's hard to put up a chart of Taylor's comment since he is reaching back to an historical comparison which has created a precedent, namely the welfare state and class division, which heralds a most uncertain future.
That uncertainty does not bode well for the EUR without radical and deep political reforms.
Side with taraxias on this one.
I have a ton of lazy friends and relatives that haven't worked for years yet they still make 2-5k per month. While the people that actually work/produce make considerably less. Just wait until inflation and more taxes kick in and then kaboom. For the past 30 years Greece has been a model of the opposite of a meritocracy--a kleptocracy where they bribed the lazy citizenry with early pensions and other entitlements. Entitlements are the key word here Leo. Virtually everyone in Greece has had a sense of entitlement. Most PASOK supporters thought they were entitled to an early pension. Most Nea Democratia supporters thought that they were entitled to not paying any tax. While all gov't officials thought they were entitled to the country's treasury. (Just look at Kosta Skiada for the latest thievery and but I'm sure there have been far bigger thieves over the past 30 years from all parties including Papariga who pocketed some nice coin from the Chinese for the sale of the ports.)
Bottom line is that although Greeks are smart, they were poorly trained to compete in today's workforce because there were no real investments made in education---everyone was too busy scheming or stealing! Where does this all lead? Well, Taraxias may have more light to shed on this matter but my best guess is Samaras ends up colluding with some major power, and then starts to rule with an iron hand within 2-3 years. ( a revolution is seemingly an impossibility and I see no chance of a civil war)
It's a crying shame...the good greeks really got screwed over
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The new Michael Lewis piece on Greece in the Oct. Vanity Fair is simply astounding:
In Athens, I several times had a feeling new to me as a journalist: a complete lack of interest in what was obviously shocking material. I’d sit down with someone who knew the inner workings of the Greek government: a big-time banker, a tax collector, a deputy finance minister, a former M.P. I’d take out my notepad and start writing down the stories that spilled out of them. Scandal after scandal poured forth. Twenty minutes into it I’d lose interest. There were simply too many: they could fill libraries, never mind a magazine article. http://www.vanityfair.com/business/features/2010/10/greeks-bearing-bonds...
Nice article thanks.
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