When I’m not writing blog posts I like to watch great movies, like Dumb and Dumber. In case you don’t know the film, it follows the lives of two young men, Harry and Lloyd, in the years before they were named to the Federal Reserve Board.
There are many wonderful scenes in the film – my four sons have memorized the entire script, word-for-word – but one in particular is appropriate for our purposes today:
Harry: I can’t believe we drove around all day and there’s not a single job in this town. There’s nothing, nada, zip.
Lloyd: Yeah, unless you wanna work 40 hours a week!
[Harry and Lloyd dissolve in laughter at the absurdity of this requirement.]
More than a decade ago(1) I proposed the idea of what I called “providential” societies,(2) those that have become so affluent they no longer aspire to achieve more for fear they will lose what they have. In these societies – Western Europe representing the most advanced case – risk-taking atrophies. No one wants to start a new business because, well, most businesses fail! Moreover, no one else can be allowed to start a new business because, well, what if it succeeded? It might run the company I work for out of business, and then what would I do? As a result, of the Global Fortune 500 firms, roughly half were launched in the US, while precisely one (1!) was launched in Europe.(3)
As the air has gone out of the European economy, unemployment rates, especially among the young, have skyrocketed. Older employees are protected by laws essentially guaranteeing lifetime employment no matter how lazy or incompetent you are, but younger people, who don’t yet have jobs, are frozen out. Interestingly, despite unemployment levels among the young that rival those experienced during the Great Depression, you see hardly any unrest around the issue. This is because young people are perfectly happy to be unemployed, to sponge off their parents and their societies. Sure, it might be nice to have some money coming in, but then you’d have to work 40 hours a week!(4)
And if our providential societies have no stomach for economic risk, imagine how they feel about military risk. Europe’s military preparedness has been in precipitous decline for decades and is now an open joke. A few years ago, a war actually broke out in Europe, in the Balkans. Europeans wrung their hands and wrote editorials about how everyone should just get along, but the most these 500 million wealthy folks could bring themselves to do was to dispatch 400 Dutch peacekeepers into the fray. These intrepid lads and lasses then stood idly by while 8,000 men and boys were murdered near the town of Srebrenica.
Eventually, the US, thoroughly disgusted, attacked the Serbs and brought the war to a quick end. But what lesson did the Europeans take from this? Did they wise up and quadruple their military budgets? Of course not – that would have cut into their cushy entitlements! No, the lesson the Europeans learned was that they could continue to rely on the American military umbrella for protection. Not content to be economic deadbeats, relying entirely on American ingenuity and competitiveness to bring good things to European soil, they were also delighted to be military deadbeats, insisting that America come to their aid against any sort of aggression. As European helplessness in the face of Russian adventurism has recently demonstrated, the Europeans were right.
European military weakness has been obvious for a long time, but its economic weakness was disguised for decades by the timely advent of the euro. This allowed deadbeat societies to borrow not at the astronomical rates lenders would normally have charged, but at the low rates justified by Germany’s credit rating. And borrow they did! After all, if taxes had had to be raised to cover all those terrific entitlements, howls of protest would have brought down governments all over Europe. Instead, European countries, especially France, Italy and the so-called peripherals, borrowed and borrowed until, finally, they couldn’t borrow any more. They borrowed, that is to say, against the future until they had no future. Obviously, there are many lessons here for the US.
It is now plain as rain that demand is nil in Europe because economic competitiveness is nil. And economic competitiveness is nil because risk has become a European four-letter-word. What Europe wants is not to become more competitive – that would mean taking risk and possibly losing – but for the rest of the world, especially the US, to become less competitive so the playing field will be leveled. This, and nothing more, is behind the European attacks on wildly successful American companies like Google.(5)
Now that we know what’s behind Europe’s lack of demand, which is dropping inflation to zero and below and stimulating NIRP, we can see how inadequate central banker policies are. Attempting to cure providentiality by lowering interest rates or buying up bonds is laughable – it’s like trying to cure cancer by drinking carrot juice. Mr. Draghi himself takes every occasion to make the point that the ECB’s quantitative easing program is only buying time for the Europeans to restructure their economies and become more competitive.
But the ECB is, in fact, part of the problem. So long as it pursues extreme policies to shore up Europe’s failing economies, what possible incentive do those economies have to tackle the difficult challenge of restructuring? The answer, of course, is “none.”
In case you doubt this, consider the farcical case of the so-called Macron law in France. Under intense pressure from Brussels to become more competitive, the Hollande government proposed to allow shops in certain tourist areas to open on Sunday once a month, up from five times a year under current law. This revolutionary breakthrough was so controversial it had no chance of passing, so Hollande simply implemented it, invoking a rarely used rule. Brussels was so impressed it granted the French a two-year extension of time to get its budgetary house in order. Truly, Jonathan Swift couldn’t have imagined a more satirical fable, except that it happens to be true.
The bottom line is that demand in Europe will remain low, interest rates will remain low-to-negative, and NIRP will become a more or less permanent feature of the European economy practically forever. Is anyone in the US paying attention?
(1) Creative Capital, pp. 9 – 22.
(2) I borrowed the word from a poem by Louise Bogan called Women: “Women have no wilderness in them,/They are provident instead.” In case you’re wondering, Bogan was being ironical. The poem rages against the cosseted lives of women (this being in 1923).
(3) America’s dominance is actually even more pronounced than these figures show, because they include so-called State Owned Enterprises. SOEs are really more like government-subsidized bureaucracies, not corporations competing straight up.
(4) Although Europe’s young bear the brunt of the Continent’s lack of competitiveness, the aging of the European population helps fuel providentiality. We all get more risk-averse as we age, and entire societies become more risk-averse as they age. On top of that, aging societies require more resources to cover rising health care costs.
(5) The New York Times recently published a breathlessly admiring portrait of Margrethe Vestager, the European Union’s hilariously misnamed “commissioner on competition.” She is really, of course, the “commissioner to undermine American competition so that hapless European companies will have more than a snowball’s chance in Hell.” See “Google’s Steely Adversary,” NYT, 4/19/15, p. B-1.
Next up: Should We Worry about Liquidity?
[To subscribe or unsubscribe, drop me a note at GregoryCurtisBlog@gmail.com.]
Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.