Live Big® Digest – Bastille Day ed.
We thought we’d commemorate the 222nd anniversary of the storming of the Bastille with a Live Big® Digest. Among other things, Bastille Day can be a reminder that the more things change, the more they stay the same (or, as the French would say: Plus ça change, plus c’est la même chose). Specifically, it’s a reminder that there is always tumult somewhere in the world, whether it be the French Revolution or the Arab Spring. Human systems build up imbalances — both economic and political — and those imbalances must eventually be eliminated. The Arab Spring may seem frightening or inspiring, depending on how you approach it, but it is clearly the result of political repression and a lack of economic opportunities that built to the point where frustrated aspirations became great enough to overcome the fear of open revolt. Imbalances can persist, but not forever.
The US and Europe are seeing their share of imbalances as well. The debt crisis in Greece and Ireland, for example, is currently challenging the stability of the “Euro Zone” and leaving financial markets with a bad case of the jitters. The US, meanwhile, struggling with its own debt imbalance, seems to have arrived at an unsustainable degree of partisanship in Washington. Surely, something has to give.
And something will give. We believe that the European Community will do what is necessary to deal with the Greek and Irish situation. As a side note, the underlying dynamic here was overspending by two governments that no longer had control of their own currency. Had Greece and Ireland not voluntarily abandoned their native currencies in favor of the Euro, they could have inflated their way out of trouble. A bout of high inflation reduces the value of the outstanding loans, allowing the governments to eventually pay off the debt as nominally-inflated tax receipts are used to pay off fixed (and now eroded) debts. Of course, too much inflation can distort behavior and be damaging to the economy, so this “solution” is best avoided when possible. Neither Greece nor Ireland, however, controls their own inflation rate, which is most influenced by the actions of the European Central Bank (ECB), currently run by dedicated inflation hawks. The only solution that leaves is a restructuring of the outstanding Greek and Irish debt, something that EU leaders have been working on. We believe that they’ll ultimately succeed and this crisis will fade.
Of course, the big show right now is the one in Washington, DC, where Congress and the White House are squaring off over deficit reduction and raising the debt limit. Here too, we believe that the instransigence currently on display will give way to a deal that gets us past the crisis. A close examination of the record suggests that our political leaders generally do the right thing in the end, though not without an unseemly amount of political posturing.
And while making short-term predictions about the economy is always problematic, we believe that the signs are more positive than negative at the moment, with not inconsiderable prospects for accelerating growth. While the housing sector continues to struggle, industrial production is still expanding, core inflation remains moderate, and the Federal Reserve has made clear that it stands ready to do whatever it can to prevent a slide back into recession. The disruptions from the tsunami in Japan will likely recede in the coming months and any easing of political tensions in the Mid East will help ease rising oil prices. This would take further pressure off of consumer wallets and make room for the kind of consumer discretionary spending that gives rise to new jobs.
The world is messy, it’s true, but the world has always been messy. And that messiness often looms larger than it should. Just as the storming of the Bastille freed but seven relatively insignificant political prisoners, the scary stories now being trumpeted on every cable news network are to a significant degree more symbolic than real in terms of ultimate economic impact.
Finally, Bastille Day also being Elissa and Dave’s anniversary, we recommend that you do as they are about to and find your way to a nice glass of wine and some aged French cheese.
Vive La Bonne Vie!