Sept. 11's silver lining

Donald Coxe December 24 2001

Sept. 11's silver lining

Donald Coxe December 24 2001

Sept. 11's silver lining

Donald Coxe

Sixty years ago, Japan bombed Pearl Harbor. Admiral Yamamoto managed that operation, but he thought it was a terrible idea. He told the ruling military clique that an attack on Hawaii would unite Americans in an all-out war against Japan that his nation could not win. He was both a great naval commander and a great forecaster.

Americans observed the Pearl Harbor anniversary the same week they observed the three-month anniversary of the bin Laden assault. In the flood of commentary about that coincidence of horrors, no one seemed to remark about the good side of those events.

Pearl Harbor rammed the U.S. into the Second World War. If the Americans had not entered the war, Hitler would have probably defeated Britain and established Nazi rule over all Europe. Japan would have taken control of most of Asia. The world benefited hugely from Pearl Harbor.

What happened within the U.S. was also beneficial. The nation was just emerging from the Depression, and the frantic buildup of American industry for war triggered a boom. The nation came together and finally began to think of itself as a global power that needed to be engaged abroad. After the war, there could be no retreat to Smoot-Hawley protectionism and Fortress America; the U.S. became the prime promoter of global free trade, and NATO put the new superpower into Europe to stay.

Will the killings of 9/11 also prove to have unexpectedly good effects?

To date, the answer is yes. Most obviously, Americans feel good about George W. Bush and he’s acting like an excellent war president. How’s that for a transformation?

As of 9/10, the U.S. was languishing in recession, although the Federal Reserve didn’t know it. Most bond market participants thought the Fed was coming near the end of its period of easing. After five rate cuts—beginning Jan. 3—of half a percentage point each, the cuts announced in June and August had been one-quarter point. Abroad, major central banks had been far more cautious than the Fed. The European Central Bank was, as usual, content with its omphaloskepsis. (That is a technical term that is useful for analyzing central bankers: it means “thoughts that arise when contemplating one’s navel.”) Then the planes hit, producing instant devastation to the airline and travel industries. Whatever doubts there had been about the U.S. economy, everybody agreed it was now in recession. (The travel and leisure industries had been the biggest job generators during the 1990s; when they went

Without bin Laden, the global economy would still be weakening. Instead, stocks are on a tear, optimism is strong.

down together suddenly, the economy was in crisis.)

The Fed immediately began a series of rate cuts that slashed the Fed Funds Rate by half—to a Japanese-style 1.73 per cent. The broadest measure of U.S. liquidity (M3 plus commercial paper) has grown at a red hot 14.7 per cent since 9/11. (For the 13 weeks prior, it had been growing at a minuscule two per cent.) As Milton Friedman has famously observed, when you’re trying to analyze the economic outlook, money matters most.

Other central banks joined the parade, including even the European Central Bank. Global liquidity is now growing at a rate that should get us out of recession within weeks. Indeed, the U.S. may well be out of recession already. It was first in among major industrial countries (excepting long-troubled Japan) and will be first to emerge. Without bin Laden, the global economy would still be weakening.

When central banks print money at a rapid clip, stocks usually rise at a rapid clip. Stocks collapsed when the American exchanges opened on Sept. 17, and kept falling until the equinox. Since then, they have been on a tear. Why hold on to cash yielding two per cent or less? Stocks may look expensive, but they’ve got to deliver better returns than that. Don’t they?

That stock market recovery has already done lovely things for American consumers. As of 9/11, millions of Americans were either losing their jobs or were worried they would lose their jobs. That grim situation came when they were down big on their stock investments. In particular, tax-exempt 401(k) plans, the basis of retirement savings for much of the workforce, had been hit hard by the bear market. (These plans are the American equivalent of employer-sponsored RRSPs.) As of the end of last year, Fidelity, the largest operator of 401 (k)s, reported that its retirement-plan clients had 81 per cent of their savings in equity funds.

So Americans feel richer and therefore more confident. According to a recent poll, they are the most optimistic about the economy they’ve been all year. People who feel richer and more confident are more likely to spend money for Christmas, and there’s a good chance they’ll do just that.

Bin Laden has restored Americans’ feeling about their country, their leadership and each other to the emotional levels of the Second World War—the last time such unity prevailed.

Bin Laden, unlike Yamamoto, you made a bad call. Eli]

Donald Coxe is chairman of Harris Investment Management in Chicago and Toronto-based Jones Heward Investments.