The Independent Market Observer

7/3/13 – Happy Fourth of July!

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Jul 3, 2013 8:12:54 AM

and tagged Market Updates, Europe

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As I prepare to head to Maine to celebrate the Fourth with my family, I’ve been reflecting on a number of my past themes—the place of the U.S. in the world, the structure of the republic, how grateful and lucky I am to live here, and how well positioned we are in the world.

The first thing I want to mention is an excellent New York Times blog post about the meaning of the Battle of Gettysburg, by Allen Guelzo. Briefly, Professor Guelzo makes a strong case that the Civil War, with Gettysburg as the turning point, helped refute the argument that democracies were unstable and could not survive. Given that democracy has become a de facto gold standard for government, the early elimination of the U.S. as an exemplar would have changed the way the world has evolved—for the worse.

In many respects, Europe is currently going through exactly the same process as the U.S. went through during the Civil War. The key question was the primacy of federal authority over state authority, expressed most immediately over the issue of slavery. Europe now faces the same question: does the whole rule, or the parts?

Europe has two advantages in resolving this. First, there is no issue as stark as slavery in play. Europe is the master of the fudge, of the in-between solution, and has resisted any effort to force a yes-or-no decision. Second, Europe was explicitly founded as an antiwar tool in the aftermath of World War II. There is no romance attached to war, as there was in the U.S. prior to our Civil War.

A war between the European states is therefore unlikely, at least in the short term. At the same time, we are slowly inching closer to a yes-or-no moment. The Cyprus banking crisis—when, for the first time, the northern countries refused to write a check—was the first hint of this. The gradually worsening confrontation between France and the EU on a number of issues may be the next.

Or, it may be one of the peripheral economies, where austerity is slowly eating away at the support for Europe. It could even be the German elections in September. Ultimately, in a democracy, if the voters say “no more,” that’s the way it will be—unless superior military force overrules that decision.

Which is precisely what happened in the U.S. at Gettysburg and thereafter. A century and a half later, the country is better for it, but I doubt today’s Europeans would be willing to fight a unification war for the benefit of their descendants.

With the resignation of the Portuguese finance and foreign ministers, the most recent round of turmoil has started. European interest rates are rising for the peripheral economies, and stock markets are tumbling. Unlike in the U.S., where a strong central government has allowed us to start to recover, Europe remains divided between regions.

The U.S. also has its divisions, of course, but we are the only large country in the world that has successfully created a voluntary, integrated union at a continental scale. We made it through our existential crisis and survived, thanks to the courage of the men who fought at Gettysburg and elsewhere.

Russia hasn’t had that moment; it is held together by force. The same is true for China. Europe isn’t held together by force but by the idea of shared prosperity—an idea that is fading.

I have written and spoken extensively about the strong position of the U.S. in the world. A primary reason we are so well positioned is that we are, in effect, many countries combined into one. Each of them has its own strengths, which, combined, amount to something even greater.

This isn’t an original thought. The founders knew it and put it on the currency: e pluribus unum. From many, one. Lincoln knew it: “A house divided against itself cannot stand.” And we know it, and benefit from it, today.

European turmoil is not going away. Nor are Chinese economic troubles or Russian demographic issues. As I look around the world, I remain incredibly grateful that my grandfather came here from Ireland. I am grateful that a great-great-grandfather’s parents came from Germany, and that he fought at Gettysburg. I am even more grateful that I could bring my son home from Vietnam.

As we celebrate Independence Day, let’s remember the heroes who got us here and thank them for all we have. Let’s look around the world and be grateful we live in the U.S. And let’s recommit to helping the rest of the world attain the blessings we enjoy.

Now for some lobster rolls. Have a great Fourth!

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