Does Taipan Daily have an anti-Europe bias? No. We simply have a hard-nosed pro-reality bias… a vital trait for traders and investors to cultivate.
Monday’s piece, on why German exports spell doom for the eurozone , ruffled a few feathers across the pond. Taipan Daily reader Jorgen C. of Denmark writes:
Read your History. Europe was always divided and still managed to cooperate. The present union is an attempt to facilitate this. In a very stark contrast to the US, Europe could fall back to national levels, and still operate in some civil order and tradition. Not so with the US. You seem strangely attracted by the hope and expectance of the fall of Europe, whereas USA is THE very big man on thin ice. Routinely lying with e.g. statistics, foreign politics, problems. The hope for USA is to infect Europe with this infection of public lies and appearances long enough for – always – just the next election, but in the meantime you also see Brasil-India-China-Russia brew together, for instance. You seem to me to be diluted by wishes. Greece is a very small part of the EU. You have considerably bigger states of the USA in much bigger trouble, and as a whole economic disaster for CERTAIN knocking on the door with the promises given. It is quite unbalanced only to focus on the problems of one part and completely ignore those of the other.
But well, that is precisely the normal perspective of Americans. A one-way perspective in THEIR world. Quite resembling criminal thinking among persons, but it goes as well for imperical thinking among nations.
Heh. Where to begin…
A sincere thanks, Jorgen, for taking the time to share a well-articulated point of view. I think you are mistaken (no real surprise there), but for some particularly instructive reasons.
First off, though, who is this reflexive defender of the United States you allude to? Repeatedly in these pages, we have skewered the criminal oligarchy in Washington. We have identified the U.S. recovery as a sham, warned of grave fiscal dangers ahead , and aggressively exposed the hollow men . There is no America-boosting here.
(On a side note, if you’re not a regular Taipan Daily reader and are interested in the above topics, you should sign up to receive my investment commentary here .)
As for reading European history ” surely you jest. Europe’s broad history is one of conflict, conquest, bitterness and war. The period of remarkable cooperation you speak of is confined to one limited era, the post-WWII era, overlaid with both a remarkably long period of unbroken prosperity (an anomaly in the big scheme of things) and a mass infusion of post-war rebuilding funds.
As for hidden desires, I do not “hope” or “wish” that the eurozone will fail. I simply expect it to, for reasons of pragmatic logic and observation. Note, too, that expecting Europe’s common currency to fail is not the same as calling for Europe on the whole to fail! Some in fact argue, quite credibly in my view, that Europe’s better tomorrows will actually begin the day after the euro is scrapped…
Forced Currency Union Doesn’t Work
Look. The history of artificial currency union is by and large one of abject failure. Like animals in the wild, economies tend to trundle along at their own pace. Lashing together an elephant and a wildebeest is a recipe for folly, though politicians seem wont to try it time and time again.
When Britain was forced out of the European Exchange Rate Mechanism in 1992, those doing the forcing did Britain a great favor. (What the U.K. economy really needed, in order to break its slump, was lower interest rates and better export prospects.)
When the Thai government refused to devalue the baht in organized fashion in the late 1990s, disaster resulted by way of delusion. (Thailand had gorged on a smorgasbord of speculative dollar-denominated loans, the weight of which threatened to crush the economy. Rather than accept the reality of this, the Thai authorities made things worse with a suicidal fight to save face.)
There are plenty of other examples where currency pegs, unions and floors have all failed, often at great cost to those who attempted them. There are some exceptions ” Hong Kong and China come to mind ” but even then, the jury is still out. Given the political troubles brewing, we have yet to see whether the world will avoid a horrible protectionist fight ” centered on currency manipulation ” that does serious damage across the board.
Again, though, this not about America versus Europe, or rooting for anyone to fail. It is more about simple logic. As some wag once observed, if you jump off a cliff and flap your arms in hope that you can fly, the universe will most likely kill you.
So, let us put aside all “pro” and “anti” biases for a moment and simply ask: How does it make sense that Germany and Greece should be subject to the exact same monetary policy? How does it make sense that monetary policy can be realistically coordinated not just across drastically different economic areas, but different cultures and even different governments?
In respect to currency union, the United States is not necessarily “better” or “superior” or any of those patriotism-charged terms. As a currency union it is simply more feasible (and more organic). Residents of California and Missouri may have quite divergent opinions on things, but they share a single federal government and a single cultural identity as Americans. They also share a genuine sense of mobility and social cohesion.
In contrast: Do Greeks and Germans really see themselves as “Europeans” first and Greeks and Germans second? No. Is there true cultural and logistical mobility between these countries? No. Are Greek and German levels of productivity anywhere near similar? No. How about household attitudes to finance, export/import mix, or functional tax and legal systems? No, no and no.
So why in blue blazes, then, do Germany and Greece ” or Germany and Italy, Spain, Portugal, etc., take your pick ” share a common currency?
Only because a group of high-minded politicians thought it would be a good idea, for reasons independent of economic reality.
“Gosh, wouldn’t it be nice if Europe could enhance its stability (and avoid another internal conflict) by embracing broad scale currency union. Wouldn’t the political and economic dividends be marvelous if we could get something like that to work.”
Yes, sure, it would be marvelous. And as the saying goes, “If ifs were a fifth, we’d all be drunk.”
There is a pattern here ” one that repeats itself over and over again.
Idealistic politicians, using the power of government, try to make an unrealistic claim on reality. Through fiscal and political might, they try to make reality the way they think it “should” be. They jump off cliffs of their own making and flap their arms like wings, believing in the power of righteousness to grant them majestic flight.
Pragmatic speculators, recognizing the folly of such delusion, then challenge the status quo in pursuit of profit. They bet on the unsustainable meeting up with the inevitable. And so, when the status quo falls apart, the speculators are branded as evil or nefarious, when in reality it was political delusion that had constructed the dangerously unstable edifice in the first place.
And so it is with Europe, or more specifically, with the common currency of the eurozone.
Where will America wind up in all this? That’s hard to say. Your humble editor is certainly no cheerleader for Uncle Sam. But one thing should be abundantly clear: Trying to interpret macroeconomic events through a patriotic lens is a recipe for distortion.
If you are going to trade currencies , or otherwise raise or lower your exposure in the marketplace based on your opinion of what will happen, please ” for your own sake ” do not fall prey to the trap of thinking that the euro and the USD are like rival sports teams, or that one “deserves” destruction moreso than another. Likelihoods of macroeconomic outcome should be judged based on distributions of historical precedent and competitive advantage, not one’s intrinsic desire to root for the home team.
It is also useful to note that, often times in the game of macro speculation, it is often some deluded government (as opposed to another speculator) on the other side of the trade. Some of the most powerful and profitable trades ever ” with scores running in the hundreds of millions to billions ” have come from the exploitation of government policy mistakes.
This reality has given something of a bad reputation to speculators, but in truth, those who exploit government folly often perform a valuable service to society at large. They do this by counteracting and reining in political delusions before letting things get too out of hand. When contrarian pessimism is banished, the most foolish flights of optimistic fancy are allowed to run free ” and the ultimate bloodletting is that much more painful.
At the upcoming Taipan Publishing Group’s 2010 Global Opportunities Summit, to be held at the beautiful Venetian Hotel in Las Vegas, I will be discussing in greater detail how smart traders exploit government policy mistakes ” and how investors can protect their nest egg in doing the same. As value investing legend Seth Klarman has said, “Sometimes, when you can’t figure out a good defense, the best thing to do is to go on offense.” That is the idea here. (If you would like to find out more about the conference, you can do so by following this link .)
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Other Related Topics: Currency Investments , European Investments , European Union , Justice Litle , Macro Trader
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