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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Stocks were chic, stocks were coolTHE EURO:A CURRENCY CREATED BY COMMITTEE At the Maastricht Summit in 1991 a group of Continental politicians eager to build a new colossusEuropeagreed on the complex terms of a new treaty. This document was to a considerable degree the brainchild of French Socialist Jacques Delors, president of the European Commission. It had long been the goal of Delors and his associates to create a counterbalance to the economic and military power of the United States. They were particularly opposed to the free market traditions of the AngloSaxon nationsthe United States and Britain. During the years of the warm relationship between Margaret Thatcher and Ronald Reagan, those countries had achieved strong economic growth with falling inflation byhorreurs!cutting taxes and government regulation, weakening the powers of large unions, and imposing monetarism. In other words, they had achieved success that had given them worldwide admiration by following policies that were the exact opposite of those advocated by the European Socialist parties. But the Anglo-Saxon sins didnt stop there. The willingness of Thatcher and Reagan to expand defense budgets, place Pershing nuclear missiles in Germany, and generally raise the ante against the Soviet Union to new heights, had been crucial factors in triggering the collapse of Soviet communism. This was a deeply disturbing development to Eurosocialists such as Delors. Their parties routinely formed electoral alliances with local Communist parties against center-right coalitions. Indeed, when the French center-right ruling coalition fell in the parliamentary election of 1997, the Communists were crucial in supplying the margin of victory and got key cabinet ministries in the government. France had quit its role in the NATO military command under de Gaulle, so it was not as if the French Socialists could claim any part in the sudden collapse of a system they had never truly opposed. (Georges Marchais, noted French Communist politician for decades, backed Stalinism to the hilt, including the Soviet Unions crushing of the freedom fighters in Hungary in 1956 and Czechoslovakia in 1968.) What made matters worse for the Eurosocialists was the obvious delight the inhabitants of Eastern Europe and even Russia had in demolishing the signs, symbols, and systems of socialism. The fall of the Berlin Wall, which was greeted with such joy by millions of rejoicing young people, was a troubling event for Socialists, who had for decades maintained that East Germany was a respectable political and economic system to West Germany. Although it seems hard to believe now, until the actual collapse of Communism, leftist parties and intellectuals in the West believed that the Communist system worked to deliver the greatest good to the greatest number of people. As social democrats, they rejected the idea of the dictatorship of the proletariat and opposed the brutality of those regimes, but they did believe that socialism was a vast improvement on capitalism, so the economic statistics published by the Socialist countries were to be treated with respect. (Even such a distinguished liberal economist as J. K. Galbraith spoke glowingly in the early 1980s of the superior economic achievements of the Soviet bloc compared with the poor performance of the U.S. and British economies.) When Delors was sketching the vision of a Europe united in one economy and one currency, he didnt dwell on his partys barely observable contribution to Western victory in the Cold War. He pointed instead to what he called the unfair advantage the Americans had because there was really no currency alternative to the dollar. Japan had already begun its descent into a long deflationary recession, but was continuing to run a Current Account surplus. That meant there could not be enough yen available abroad for central banks and other major currency holders to use as an alternative to the dollar. Echoing de Gaulles complaints of three decades earlier, Delors noted that this status of unchallenged eminence meant the arrogance of power. This meant, he claimed (correctly), that U.S. businesses got an indirect but important subsidy from the rest of the world, because foreign central banks were forced to hold dollar-denominated instruments, which meant U.S. interest rates were lower than they would be if the United States had to finance its own economy. Delors calculated this subsidy to U.S. corporations at close to 1 percent on dollar-denominated bonds and Eurodollar loans. Delors understood something few Americans did: Being the reserve currency issued by the worlds largest single economy and free trade zone, with the deepest and most liquid capital market, is a unique advantage. In contrast, the markets where securities are denominated in francs, guilders, deutschemarks, lire, escudos, and pounds are small and illiquid. In terms of financial markets, bigger is most definitely better. His arguments carried the day. The Continental countries signed on to the Maastricht Treaty of the single market and the new single currency. Denmark and, most important, Britain finally agreed to the rest of the treaty, but deferred agreement on currency union. (John Major, Margaret Thatchers successor, knew that giving up the pound for a new currency in an economy dominated by the Germans and French would be profoundly unpopular at home; his predecessor and Delors had clashed frequently: Thatcher claimed that increasing the power of the Eurocrats in Brussels would be socialism by the back Delors.) Although the rest of the Continental members of the EU signed on to the euro, few of the governments ever submitted the question to a direct vote of the populace. Chancellor Helmut Kohl wanted to be known as (1) the longest-serving chancellorlonger even than Bismarck, (2) the chancellor who had reunited Germany, and (3) the chancellor who had been the key player in the formation of a united Europe, which would never again face the threat of war. Since the euro was the linchpin of this unity, he couldnt let his people vote on it in a referendum. He knew that the nation was deeply proud of its deutschemark, the one German national institution in which his guilt-ridden nation believed. His agreement to sacrifice this precious national symbol and unifier to achieve the New Europe was the highlight of Maastrichtand a major factor in his ultimate electoral defeat. Although the euro was agreed to in 1991, it took nearly a decade to make it a full reality. It began trading as a financialbut not papercurrency in 1999, and replaced all the predecessor paper currencies in 2002. This lengthy discussion of the origins of the euro is necessary, because the story of the Fall of the Dollar needs a challenger: No king is dethroned without a pretender, and no champion loses his title without a defeat. The dollar had been king for 60 years when the men met at Maastricht. It was looking strong at that point because for a few months the massive payments to the United States for the Gulf War from Germany, Japan, and some of the Arab oil states gave the United States a Current Account surplus, an event that had occurred about as frequently as the reappearance of Halleys Comet (which also arrived and, as swiftly, departed). However, once the United States was no longer being paid for global peacemaking, the dollars problems resurfaced. It gained a new lease on life in 1995, however, and seemed to have imbibed from the Fountain of Youth when the euro was born and thrust into the global currency markets in 1999. (See Charts 6-6 and 6-7. Note that Chart 6-6 uses the deutschemarks exchange rate for the period prior to the beginning of trade in the euro.) Before the euro was launched, there were widespread predictions that it would swiftly become the new global store of value, replacing the dollar. It was the currency of the worlds second-largest free trade zone, a region with a Current Account surplus and one that boasted fiscal deficit control imposed by treaty. A bond market for euro-denominated securities developed rapidly. It looked like the euro would shortly be a worthy substitute for dollars in global exchange reserve accounts. The noted American economist, Fred Bergsten, testified to Congress that the advent of the euro threatened the dollar and, thereby, the continued strength of American capital markets and the American economy. In part because the hype had been so hot, the newborn baby became an instant embarrassment. The euro came, was seen, and was conqueredby the newly mighty dollar. Among its other misfortunes, it had the bad luck to be born at a time when the U.S. economy had never looked better. The whole world was agog at the talk of the New Economy, and the connubial bliss flowing from the union between Silicon Valley and Wall Street was where it was at. With the promise of everyone becoming wired on the Web, a new era of peace and prosperity loomedjust in time for the New Millennium. This American triumphalism was easier for the rest of the world to take because it didnt involve military actions or trade embargoes. Companies such as Microsoft, Intel, Cisco, and Dell were bringing the wonders of the most advanced technology to the whole worldthey werent imposing it on anybody. Young people in repressive societies such as Iran, China, and the Arab states could plug into these liberating forces in their own homes, through the incredible power of the Web. As the TV commercial put it: Is this a good time to be alive or what? A basic component of this great time to be alive was that it was a great time to invest. Stocks were chic, stocks were cool. Europeans discovered the joys of equity mutual funds during the 1990s. Until then, most Continentals saved through bank deposits and real estate. Until as recently as the early 1980s, for instance, the Frankfurt Stock Exchange had been open only a few hours a day, during which time the trading was largely conducted between representatives of the big German banks. In part because of the Web, the Equity Love Affair that had been enrapturing American Boomers and Gen-Xers spread across the ocean. But another reason for this un-Continental upsurge in enthusiasm for stocks was the force of demography: European economies were aging even more rapidly than the United States, and the outlook for viability of the extremely generous European social security programs was grim. Besides, Europeans had lots of something of which Americans had little: savings. This lack had long been part of the dollars problems, but for a few years it would become a factor in a remarkable dollar bull market. |
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