Francois Hollande is the new president of France - so what?
By JIM THOMPSON
For The Highland County Press
Monsieur Hollande is only the second socialist president in France’s colorful political history. He ran on a platform of “forget austerity, let's grow our way out of the current economic malaise.”
His election and a near-simultaneous one in Greece may be the falling dominoes that bring down the Euro as a currency.
For at the same time he was elected, coming to the stage from the far left, Greece was electing far right neo-Nazis for the same reason. What was that reason? Stop the austerity, let’s get government back to spending money.
This leaves Germany standing virtually alone as the defender of the Euro. Economists are saying it may fail within six months.
“Growing our way out of the current economic mess” is code for inflation. If you want to see how inflation works, study Brazil and Argentina.
When I was there many years ago, you couldn’t use credit cards because no one knew what the exchange rate would be when the debt was finally processed. The Sao Paulo newspapers published bus rates daily, because they changed daily. Prices on restaurant menus changed daily. Living with daily price changes became a way of life.
I knew a missionary whose wife worked as an aid in the public schools. Monthly salaries were set each year during the vacation time. Salaries were paid monthly, six months in arrears. By the time she got paid, the money was nearly worthless.
I am not suggesting this is what will happen to us, at least not in the next year or so (but it’s coming if we don’t get our fiscal house in order). What is more concerning is what the failure of the Euro will do to worldwide finances.
There are just a few money centers in the world — London, New York, Hong Kong, and, to a lesser extent, Frankfurt, Singapore and Toronto. In these locations, large sums of money move and key indicators such as interest rates, are set.
Most large businesses worldwide have operating loans (the money they need to operate day-to-day) set by LIBOR (the London Interbank Offered Rate). This affects you at Wal-mart.
It works this way: Wal-mart buys the goods they have in their stores. They have to pay for these.
This is usually done with an operating revolving loan whose interest rate is set by LIBOR. Likewise, the companies that make the goods for Wal-mart, no matter where they are, have similar operating loans with interest rates pegged the same way.
What goes on in Europe, and indeed everywhere, affects LIBOR and LIBOR affects everyone else. Want to change this? You are bucking decades of tradition. LIBOR is the most widely published interest rate in the world.
If turmoil occurs, severe turmoil that may be on the horizon in Europe, LIBOR will go up, way up. You will pay more for everything you buy, for there is a LIBOR cost component in everything you buy. If the inflation that may occur in Europe is “normal” (say, less than 6-8%) you’ll not notice this so much.
However, if it becomes hyperinflation, LIBOR may reach 20% or more. You’ll notice this. It will also affect house loans, car loans and credit card rates. The money behind all these financial tools has a LIBOR component.
The modern industrial and banking system is the result of two geniuses of the nineteenth century. One of these was Cornelius Vanderbilt, who created the modern corporation when he, at a late age, put together the railroad known as the New York Central System.
This was the first business to have departments of people that were not actually engaged in the objectives of the business (transporting something). The railroad was so complicated it needed billing clerks, schedulers, bookkeepers and so forth — people who never actually touched the transportation services of the company.
The other was J. P. Morgan. He built the modern international investment bank.
You can disparage Mr. Morgan or Commodore Vanderbilt, but these two gentlemen set in motion the world you enjoy today. Without them and the systems, methods and traditions they created, you would probably be sitting in a small home, weaving cloth by candlelight.
Be careful about biting the hands that have given you all your modern toys (or maybe not – every day I think, more and more, perhaps the Amish are the most prescient people in the history of humankind).
And keep one eye on Europe. You may not be able to do much about it, but what goes on there impacts you in ways you can’t even imagine.
Jim Thompson, formerly of Marshall, is a graduate of Hillsboro High School and the University of Cincinnati. He resides in Duluth, Ga., following decades of wandering the world, and is a columnist for The Highland County Press.[[In-content Ad]]