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Thursday, 10 November 2011

Markets and Memories

Twenty years ago Britain was struggling to retain membership of the European Exchange Rate Mechanism [ERM]. Ministers railed against pessimistic forecasts from market analysts, whom they stigmatised as 'teenage scribblers' - people whose exposition of the current market situation was uninformed by memories of previous difficult periods for the value of the British pound. The struggle was lost: Britain had to withdraw from the ERM and George Soros came away from his speculative involvement as a much richer man.

Italy stayed within the ERM: as a very specially privileged member. Under the rules of the System the other member countries had to take action to ensure that the market 'value'of their currencies remained within 2.5% of the median value of all the members' currencies: except the Italian Lira which was allowed to deviate from the median by 7.5% [and was informally allowed to get worse than that]. So the strongest currency - often the German Mark - could be 2.5% above the line, while Italy was [officially] 7.5% below: that was a 10% gap in Italy's favour.

It was therefore to be expected that when the Euro was  created the other members of the old ERM club were habituated to turning a blind eye to detailed deviation by Italy from the strict entry criteria that were notionally imposed. Given that Italy was allowed to do this, the Greeks considered themselves licensed to take the trickery further. The manipulators of 'The European Project' carried with them huge optimism bias. They convinced themselves that all would be best in the best of all possible Europes if an all-inclusive Euro drove forward continental prosperity.

The teenage scribblers of 2011 have no significant historical awareness and no relevant understanding; consequently they have advised their clients to make the Eurozone situation much worse. When the dust has settled on the slowly developing crisis of 2007 to 2014 the memory will fade; and the next panic will collapse .

Germany needs an explanation for Hitler. One of the strongest is the idea that the hyperinflation of the early nineteen twenties caused the economic and social chaos that made even Nazism seem preferable. So millions of Germans are well primed to vote against any policy that could lead to excessive inflation, including 'quantitative easing' by the European Central Bank. Hence Chancellor Merkel has stood out against the ECB following the line taken by the US Federal Reserve and the Bank of England. So in this context selective historical recollection is of very dubious value; but it is very powerful. Whether or not it is more powerful than 'the markets' we will son see.

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