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6/7/2012 12:04 AM
Pulling Europe out of the Rubble -Again
By Charles Payne, CEO & Principal Analyst
Eightieth Congress of the United States of America
To promote world peace, and the general welfare, national interest , and foreign policy of the united states through economic, financial, and other measures necessary to the maintenance of conditions aboard inn which free institutions may survive and consistent with the maintenance of the strength and stability of the United States.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, that this Act may be cited as the-Foreign Assistance Act of 1948.
I realize the market is all abuzz about the next round of money-printing, but the more I read comments from Mario Draghi, head of the ECB and its glorious Euro-printing machine, the more I believe money is going to be limited until there is a greater tie-up of Europe. In fact, I'm surprised someone hasn't called for a Marshall Plan II for Europe. Just think about all the reasons we backed the Marshall Plan back in 1948. In a nutshell, Europe needed a massive jump-start. Here is more language from the act (title I):
The restoration and maintenance in European countries of principles of individual liberty, free institutions, and genuine independence rest largely upon the establishment of sound economic conditions, stable international economic relationships and the achievement by the countries of Europe of healthy economic independent of extraordinary outside assistance.
In other words, we decided an infusion of cash would create a perpetual motion machine of economic prosperity with all the fringe benefits that come along with the package. It wasn't all altruistic as part of the act that portrayed America as having distinct advantages such as enjoying the existence of a large domestic market and no international trade barriers and wanting Europe to have the same. Fast forward to the Euro, which was supposed to mitigate these problems as well but still isn't enough. That gets us back to a common banking system. Of course there would have to be common trade policy authorized by a central authority as well.
The Fallacy of Holding Back Germany
I've written about it before, but it's worth mentioning again while the aim after WWI & WWII was to mitigate the mighty Germany military machine there was a more nefarious effort to wreck the even mightier Germany industrial machine. At the conclusion of WWII the United States and Britain expended a ton of effort toward letting Germany's industrial complex rot. Unfortunately for the rest of the continent, the German industrial complex was the linchpin for everyone's prosperity, so the plan backfired—miserably.
Marshalling the Troops
A war torn Europe was being squeezed by the deliberate effort to stop Germany from rising out of the rubble to control the continent. Secretary of State George Marshall headed up the effort that eventually landed him the Nobel Peace Prize and gave the world the eponymous rescue plan. Beyond the need to spark an economic revival, the United States needed to stave off the rapid spread of communism, which is why the first tranches of money went to Greece and Turkey. It is ironic that the rise of the communist party in Greece is once again adding a sense of urgency in the mix.
The plan went into effect, yet the dismantling of Germany's industrial might continued. Eventually, the allies relented (of course France was the biggest agitator of this action in the first place), and soon Europe was on its way to self-respect. That was then and this is now but parallels exist. There is a need for a massive cash infusion, but this time it's not to climb out from the rubble of bombers but from the rubble of squandered greatness and massive welfare policies.
Who's writing the Check?
America put up $13.0 billion into the Marshall Plan on top of the $14.0 billion it plowed into Europe immediately at the conclusion of fighting. We're talking 5% of GDP, which would be the equivalent of $650.0 billion today. Well, it looks as if it's going to cost a lot more than that to "fix" Europe. At some point America is going to be asked to put up cash toward a modern day Marshall Plan, in part because all the same rationale exists now that existed back then. Before we get to that point, Germany has to decide how it wants to play its hand while Spain begins to make more demands and threats.
Yesterday was the 78th anniversary of D-Day the invasion by the allies of Normandy, and many are saying June 20th will be D-Day for Spain.
There will be a lot of behind closed doors negotiating along with leaks, counter-leaks and fights via the media. I continue to say that if Germany steps to the plate, it will be to say take that old Marshall Plan and stuff it ... you couldn't keep us down and now you want our money? It's going to cost you plenty. This will be the fourth national bailout in the last two years and even those nations that already got funding are licking their chops for seconds. I do find it weird that Spain wants a direct cash infusion to avoid humiliation, yet it may be ready to toss in its own rights to control its budget in the future.
This episode is fascinating to watch but painful to endure. The good news is that we have a lot of lessons learn as a nation and even as individuals. As for the stock market there were a lot of bears sounding off yesterday about selling into the best session of the year based on a variety of reasons but none of them were fundamentals. The rollercoaster ride continues, and if Ben Bernanke doesn't give the right wink and nod, we could swoon again.
Buckle up your seat belts.
The Beige Book typically is a non-event and yesterday was no exception with respect to the market, but there are interesting developments.
> Moderate/Modest growth
> Retail Steady/Stronger
> Loan demand higher (New York)
It's all anecdotal stuff but better anecdotal stuff than we'd been getting.
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