Europe’s FDR Moment

Think of this as Volume 16, Number 17 of A-Clue.com, the online newsletter I've written since 1997. Enjoy.

Something about this latest market move south troubles me.

It may have to do with the politics of the players. I've been writing at Seeking Alpha for almost a year now, and if there is one thing I've learned it's that most of the voluble small investors I see there are Republicans. Usually conservative ones.

Which means they buy the whole malarkey of the right. That the only way out of deficit is to throw grandma from the train. You can't raise taxes on the “wealth producers,” because they'll either quit or move. We can't cut the military budget, neither. Nope, it's break the promises of two generations, Medicare and Social Security. Otherwise you're not serious.

Something else I've observed about these folks. Pessimism doesn't quite cut it. Cynicism doesn't quite cut it. Armageddon-ism sounds closest. They assume the worst in people, they see unmitigated disaster at every turn, yet they seem to assume someone other than themselves will suffer when that happens.

That attitude is nonsense. I know. I lived it. I railed against the excesses of the dot-com era throughout the late 1990s, right here at a-clue.com. But when the disaster happened my warnings did not make me immune, not at all. I went from 17 writing accounts to zero in about a year. My total income for 2002 and 2003 came to zero dollars. If it weren't for my wonderful wife, and (frankly) her parents, we would have been in for it. As it was the kids had to go into the public school system, and my eldest still suffers for that.

Anyway, the news as this was written was that Socialist Francois Hollande is now favored to become the French President and beat Nicolas Sarkozy. My Seeking Alpha readers are very upset, because they see “Socialist” and assume money is about to become worthless. They see hyper-inflation, they see the break-up of Europe, they see disaster.

Which is crazy. First because Sarkozy would be, on the American scale, to the left of Bernie Sanders. Second, because the real debate in Europe is one we've already had here, namely how do you get out of depression.

While Europe has been going the Hoover-Mellon road, pushing austerity on countries like Greece, Italy and Spain to the point where people there are ready to revolt (quite literally), America followed TARP up with the Obama stimulus, with quantitative easing once rates fell to zero.

What is the result of the experiment? Europe is in recession, America is growing. The dollar has not gone to hell in a handbasket. People are getting jobs here, and things are looking up.

The “Great Satan” of today's American Right isn't (as you presume) the President. It's the head of the Federal Reserve, Ben Bernanke. “Helicopter Ben” (so-called because he facetiously suggested throwing money from helicopters to boost demand) has kept the money supply up through the crisis, just as thinkers like John Maynard Keynes suggested two generations ago. Europe, by contrast, has followed an Austrian School model, and those who follow that school of thinking today are absolutely convinced the world won't see 2013.

But let's assume Hollande wins. I think that's a good bet, because in order to have a ghost of a chance Sarkozy has to win all those who voted for far-rightist Marine Le Pen, who (much like America's small investors) hates immigrants, hates foreigners, and thinks that “Fortress France” can somehow make it on its own through the world's stormy economic seas.

She is a loony.

In order to win her votes, Sarkozy will have to ape her positions. This leaves him vulnerable in the center, from the business community, in his base. I don't think he can thread that needle any more than I think Mitt Romney can draw the White House with an Etch-a-Sketch.

So you'll have a Socialist as President of France. So what? The French President of the IMF is a Socialist. So was her predecessor. And what is Christine La Garde calling for? Stimulus. New lending. The creation of demand through government action. In short, a New Deal for Europe.

Can it work? Well here I have to violate Godwin's Law and say, “Hitler.”

One question today's conservatives have never answered, because they really can't without condemning themselves, is how Hitler got Germany's economy moving again. Between 1933 and 1939 Germany's economy grew at an incredible pace. But they were broke before. So how'd he do it?

By demanding demand. By creating demand for products and services. Yeah, it was done in an evil cause. And its result was the most unspeakable evil. But eventually the U.S. bulked up demand to face him, and after the war we had the mass production to match the world's demands – especially as we stimulated that demand again through acts like the Marshall Plan and the G.I. Bill.

This is our history. This is what happened. When the private economy is in crisis, someone has to step in and buy. Mass production is naturally deflationary – more so in the era of Moore's Law – but while deflation is ruinous, a little inflation can actually be helpful.

Which leaves us playing the 1932 Game and asking, “Who's Herbert Hoover now?” And the answer comes back, it's Angela Merkel, Germany's chancellor. The next German election will be in 2013 and based on past state results, a guy nicknamed “Siggi Pop” might just beat her.

Europe's political winds, in other words, are suddenly blowing left. This is what has my readers so upset, so up in arms. But sometimes, when you're facing depression, when you're facing slack demand, left is right. When everyone screams sell, someone has to step in and say buy. Yeah, you can overdo it, but before that happens people will start blowing the winds the other way.

People aren't sheep. They're not stupid. Given the facts, most will support muddling through over Armageddon. Every time. It's what I like about democracy, despite all its faults. It's only when they're not given the choice (because Armageddonists won't let go of the wheel) that the ship goes down.

Meanwhile, what we're going to get after France's next election is a demand for growth, for stimulus, for new loans and new money and jobs. And given the views of her own people, I don't think Angela Merkel's German veto will stand much of a chance in that political environment.