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Gary Alexander

Nations Usually Recover – and so do Stock Markets

Posted by: Gary Alexander on 7/15/2010 12:00:00 AM

This week's blog is a bit of a departure from my normal commentary where I typically consider economic and stock market related topics. I just got back from a very interesting conference in Las Vegas where the speakers focused on political topics. The conference inspired me to consider a longer term historical perspective with respect to current conditions in the United States. At the conference, where many of the of speakers expounded on the imminent downfall of the U.S. dollar, further decline of the stock market, our shaky banking system and the fading of our global military "empire." Several of the "doom and gloom" speakers predicted we'll see a double-dip recession, led by a new housing decline; with states and local governments declaring bankruptcy; rising interest rates (and/or inflation) exacerbating deficits. Making matters worse, they foresee a China slowdown leading to a global slowdown; and an invasion of Mexican gangsters and terrorists, pouring into to America through our southern borders - all resulting in a run on the dollar and a market crash.

Ouch! Is there any hope? Yes, there certainly is. A lot of other speakers hearkened back to the words of America's founding fathers. In the closing banquet, for instance, I had the honor of playing John Adams in a dramatization of selections from the musical "1776," along with Steve Forbes as George Washington, Mark Skousen as Ben Franklin, a professional Thomas Jefferson impersonator (Bill Barker) and David T. Phillips as Roger Sherman. Look for it on You Tube someday soon.

Our songs and dialogue from "1776" reminded viewers of a time when five great documents of freedom were published in one year: Thomas Paine's Common Sense in January, 1776; Adam Smith's Wealth of Nations in March; the Declaration of Independence in July; Edward Gibbons' Decline and Fall of the Roman Empire, Volume I, in the fall, and Thomas Paine's second great work of 1776, The American Crisis, on December 23, with the memorable opening line, "These are the times that try men's souls."

Obviously, 1776 was an amazing year in the formation of our great country, but for the common man living at that time, it was a very uncertain period . Victory was right around the corner for America, and defeat soon haunted Britain after their disastrous surrender at Saratoga (NY) in October of 1777. When news of that defeat reached Britain, a young Scottish barrister, Sir John Sinclair of Ulbster, then age 23, told economist Adam Smith, then 54: "If we go on at this rate, the nation must be ruined."

Adam Smith responded, "Be assured, young friend that there is a great deal of ruin in a nation." By that, he meant that nations can absorb a lot more blows than the pessimists think. Later, British historian Paul Johnson translated Smith's idea into 20th Century realities: "People can absorb frightening abuse from governments and bounce back." Those 10 words encapsulate the last century almost perfectly.

Smith was Right: Britain Absorbed "A Great Deal of Ruin"

Look at Britain's "ruin" after Smith's famous quote. In the wake of their own misbegotten "Vietnam War" in America, Britain lost the colonies, but their domestic Industrial Revolution soon expanded British per capita wealth at the most rapid rate in history: Per-capita wealth doubled from 1800 to 1850, and doubled again from 1850 to 1900, while population quadrupled, yielding a 16-fold growth of wealth.

The British Empire began to contract during World War I, when Britain was forced to fight on a second front in Ireland, with the Easter Uprising of 1916. By the 1970s, the pound sterling collapsed and Britain was the "sick man of Europe." But the sick man found the right woman in 1979, when Margaret Thatcher became the first female prime minister in British history - with the longest tenure. Thatcher privatized national industries and cut government spending - and also got lucky with oil in the North Sea.

Pretty soon, Britain thrived and Ireland became the new sick man of Europe, mired in a no-win war with Britain and a dead economy. But after some business tax cuts, Ireland became one of the most rapidly growing economies in the euro region. Suddenly, the seemingly endless Irish war quietly ended. The Irish were too busy making money to fight. Needless to say, rising stock markets followed quickly.

Today's Danger Spots will Also Cool Down Some Day, Maybe Soon

Today, the worry warts tell us that the various Middle Eastern conflicts will last forever. After all, they've lasted for centuries. Islamic fundamentalists will attack America again, since this animosity can never die.

What if we were seduced by this defeatist attitude last century? In 1945, most of the world believed that German and Japanese nationalism could never be cured, since German militarism and Japan's Bushido code could never be "legislated out of existence." But Japan and Germany are thoroughly pacified today and remain solid trade partners with the U.S.

The same is true of the major post-war geopolitical threats in the second half of the 20th Century:

• In 1976, when Mao died, nobody saw the possibility of the rise of a disgraced former comrade, Deng Xiaoping, opening up Communist China to capitalism, lifting hundreds of millions of Chinese out of poverty and into today's fastest-growing capitalist economy.



• In 1989, when the Chinese cracked down on protestors in Tiananmen Square, who would have guessed that the Berlin Wall would fall that same year, without any resistance? The Cold War ended in one night, after 45 years of stalemate, and the stock markets took off in the 1990s.



• In the early 1990s, when white Afrikaaners firmly controlled racially-segregated South Africa, who could have foreseen that nation's leader freeing Nelson Mandela from 28 years in prison and then inviting him to take over the nation? Do you believe in miracles? They continue to happen.

If these changes once seemed impossible, why can't the Middle East also lurch toward peace over the next generation? Maybe the conflicts in Iraq and Afghanistan can generate democratic reforms and ultimately lead those countries to become stable and prosperous . Maybe the radical Islamic terrorists will be seduced by capitalism, like Germany and Japan after World War II.

Adam Smith was right. Nations can learn from their mistakes. They can take a licking and keep on ticking. Rome may not rule the world, but it still thrives. Nations that lag today could lead tomorrow. That means that as investors we can remain confident that our country is resilient and will continue to provide lucrative opportunities for those with conviction and confidence. Frankly, we believe that which we fear the most is least likely to happen.

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