EDITOR’S NOTE: This article was first published in the National Post, September 15, 2001. In the days after the 9/11 attacks, Reuven Brenner predicted “both rapid recovery and a strong market rally.” Five years later, his sentiments about the resilience of free-market economies at times of adversity still ring true.
Once the United States’ leadership clearly signals to the rest of the world that it seeks victory rather than compromise, and that it understands that democratized capital markets are the key to its riches, prosperity will be swift, and its foundations will be strengthened. This has always been the case.
Greek legend spoke about the phoenix, a fabulous Egyptian bird that enriched the country. The bird then sang a melodious dirge, flapped its wings to set the accumulated wealth and itself afire, and rose from the ashes with new, vigorous life.
The metaphor reveals a fundamental trait about human nature following tragedy, whether wars or disasters, corporate bankruptcy or national default. When push comes to shove, people abandon traditions, they bet on new ideas and they sustain heightened levels of effort. However, whether these higher levels of effort are constructive or destructive depends on where the effort is channeled.
In countries with no financial markets to speak of, and with little political accountability, the efforts become destructive. These countries do not rise from the ashes. They fall behind, becoming mired in tribal and ethnic fights, and in petty envy. Ideas and efforts become expressed in religious, racist or nationalist fervors.
In countries that have relatively open financial markets, plus checks and balances in their political sphere, the efforts become constructive, and the prosperity of the countries quickly soars, and on more solid foundations. The greater accountability in both private and political spheres allows people to start anew by giving them access to new, imagined futures.
When people cannot bet on possible futures because financial markets don’t exist to allow people to borrow against them, most people are stuck with one “official” future — the one imagined by the political power. Those who still deviate are often reduced to making destructive bets on the margins. These societies stay buried in the past and become frustratingly obsessed with drawing up the balance sheets of history.
Which brings us to this week’s events — the first time in more than a hundred years that the U.S. found itself attacked on its own territory. The impacts of the destruction of life and property will take time to sink in, but the U.S. will quickly prosper. Countries that have open financial markets, and that hold their governments accountable, have always done so, as have countries in the process of establishing free financial and political institutions.
When Philip II’s gold-endowed Spain fought the seemingly poor Dutch, the latter not only won the war but became the economic miracle of the 17th century. How? The Dutch created the first federal state in Europe, which was tolerant of all religious groups, and they created the first stock market in the world, which attracted financiers and skilled craftsmen from the rest of Europe, Russia and India.
After the Second World War, the Jewish survivors in Europe who landed in countries with open capital markets thrived, despite losing their families and everything else. Those who found themselves under communism did not — until they were allowed to leave for the West or Israel.
The Shanghai-based Chinese, their property destroyed and confiscated, similarly rose from the ashes in Hong Kong. The Chinese thrown out of Malaysia thrived in Singapore. Loss of family and property — tragic as they are — do not condemn people to poverty. People are condemned to poverty when political powers keep capital markets closed, thus denying people access to borrow against their new futures.
Consider Germany after World War II. Although much of its infrastructure was in shambles, and although it lost millions of lives, West Germany revived rapidly, whereas communist East Germany didn’t. Germany recovered because of Ludwig Erhard’s currency reform, his drastic tax cuts, and the influx of millions of skilled Germans from Poland, Czechoslovakia and East Germany who were all eager to work.
The U.S. does not need to make any Erhard-style changes. It has a solid currency, it has the world’s most open financial markets, and it attracts the world’s best talent to complement the vast pool of talent and ambition that constitute the American people.
Crises quickly bring people back to fundamentals. The U.S. recovered rapidly from the Cuban Missile Crisis, the Kennedy assassination, and the Gulf War. And during World War II, once the United States entered the war, the Dow doubled between 1942 and 1946. Victory against dictators and those who would impose their “one and only truth” on everyone, brings about expectations of wealth.
Contrary to economists’ doomsday scenarios, I expect both rapid recovery and a strong market rally, and not only because the United States will succeed and recover quickly. Countries such as Canada, Mexico, Japan and those of Western Europe who have been languishing in bureaucratic stupor or worse during the last two decades, will be less able to count on the U.S. engine to pull them out and cover for their domestic political blunders. Because of the U.S. setback, they will have to restart their engines on their own and bring about changes to strengthen their own capital markets. The resulting shift toward greater accountability will strengthen the West politically and economically. And markets will reflect expectations of the increased wealth creation.
– Reuven Brenner holds the Repap chair at Desautels’ Faculty of Management, and is partner in Match Strategic Partners. He is the author, most recently, of Force of Finance.