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