On reflection, following our November 16 commentary, “Paris,” we would like to offer some additional thoughts. First, we thank readers for their comments, both in agreement and disagreement. We had suggested that the events in Paris demonstrated the spread of “jihadism” beyond the scope of other, similar experiences in Europe. A reader disagreed and pointed to “London and Madrid” as qualifiers. We think this time in Paris is different. In the other instances we did not see a broadened use of “emergency powers” implemented by a democratic government. In France, too, that is a departure from responses to previous acts of a jihadist nature.
Please understand that we don’t want to debate about the significance of one act of terrorism versus another. Our focus is on the responses to the acts and the structural changes needed, if any. We are not trying to say that one murderous act is worse or less bad than another. The act of murder itself is abhorrent.
The personal metaphor by which we interpret the Paris events starts with the 1993 World Trade Center garage bombing in New York, which shook the building but did not topple it, versus the 9/11 attack. Our purpose is to identify an event that causes major societal change. 1993 triggered changes in the American security apparatus, but 9/11 altered our legal and political systems in major ways. We believe Paris is similar. It is broadly altering the landscape. ISIS claims responsibility for the Paris attacks, the crash of the Russian airliner, and the bombings in Beirut; but it is the Paris attacks that have changed law in France and mobilized that nation’s wrath. It is Paris that has altered the military campaign in the Levant. (For President Putin, the Russian airliner downing is triggering a similarly fierce response, but Putin doesn’t need the legislative support that Hollande does. The wrath of the Russian response is already visible in the number of sorties flown by Russian airpower.)
Our comparison of Paris to the United States’ 9/11 was questioned by readers. We recalled the 1993 WTC bombing as an ignored warning, while the 9/11 attack changed things in America. The sequence of the Hebdo murders presaging this last round of attacks suggests a similar pattern. But, again, our purpose in writing was not to equate or distinguish one act from another. In all these cases innocent people are dead at the hands of terrorists who espouse a creed of murder.
We argue that political leaders should not make war on concepts. We are not at war with an “ism.” In World War II the allies fought Fascism and Nazism. We now fight Jihadism and radical Islamism. But our argument here is that we need to focus on the actual target, not the ideology.
We must not dilute our response by limiting it to opposition to an ideology. Of course there is an ideology. Of course we do not agree with it. But the ideology of hatism or killism does not pull the trigger if there is no sanctuary to train the triggerman and if there is no economic platform to support and finance the triggerman and if there is no logistical system to supply the triggerman. When we destroy those elements, we defeat the ideologue who might otherwise kill us.
It is time to clearly say that the war is with the terrorists, not terrorism. The war is with the jihadist, not “jihadism.” The enemy has two legs, two arms, two eyes, and two ears. The enemy is a woman or a man who wants to kill you. The enemy is not an “ism.” George Bush launched the “War on Terror.” He picked the wrong target. President Hollande did the same in his speech when he invoked the “ism.”
That lesson still appears to be unlearned by political leaders, who seem to fear direct language. Political correctness seems to introduce “isms” into their speech. Leaders of the free world, we are not at war with an “ism”; we are at war with an enemy who wants to kill us. The idea here is simple: shoot and kill the enemy before the enemy kills you.
We need to change gears now and step down from the bully pulpit. Let’s segue to examining the outcome of these events in financial terms.
We have been asked about the implications of Paris for financial markets. It is a natural question even on the heels of a tragic act.
Simply put, the events in Paris mean that France will likely go into recession. It will do so as the second largest country in the Eurozone. At the same time, Germany has a weakening economy because of the Volkswagen scandal. Some estimate that the Volkswagen debacle will take 1% or more out of GDP growth in Germany. The impact of murderous acts in Paris mean tourism will be diminished in the Eurozone. We already hear conversations from people who say, “I don’t want to go to Greece,” “I don’t want to go to Italy,” or “I’m afraid to go to Spain or France or Belgium.” Those fears will persist for some time.
The hospitality industry is injured by these events, which will reduce services, employment, and related economic activity. We think the estimated lowered growth rates for the Eurozone and Europe generally are going to go even lower. Any indications that there might be some inflation are now diminished. The 2016 outlook for the Eurozone and Europe is not a healthy one when it comes to economic growth. In Europe, the growth rate could be near zero. The inflation rate will also be about zero. And impediments to growth will be larger as security concerns drive decisions. The interconnected issues of open borders, immigration, and refugee status are now on the table for revision.
What about central banks?
The nature of central banks is to respond to any crisis by easing in some way. They certainly do not tighten under such circumstances. The situation in Europe, post-Paris, means the European Central Bank (ECB) faces an additional headwind. The ECB was already headed for reduction of its policy interest rate to a new and more negative rate. Events in France and the needs of the French government for additional debt financing are now coupled with the scandal in Germany involving Volkswagen. The two largest economies in Europe have suffered economic body blows. One of them has suffered loss of human life. Both of them are wounded for at least a year.
Why did financial markets react the way they did after the weekend news flow? We think the reason lies in the robust outlook for monetary easing in Europe. Financial markets are assessing this sea change in sentiment. The projected outcome for economic growth in Europe has weakened. There is a diminution of any inflationary tendency. Thus financial market agents have reacted to the outlook for lower negative interest rates and more monetary stimulus coming from the ECB. In sympathy with that, Japanese markets have followed.
Lastly, what do we expect the Federal Reserve (Fed) to do?
We do not expect the Fed to change its posture. The Fed decision-makers’ inclination towards liftoff away from zero will not be blunted by terrorists’ actions in Europe. The Fed wants to get away from zero. But the Fed may pause and deliberate longer as the weakening incoming data trigger more intense internal debate. Only harsh, abruptly declining economic data could alter the outlook for a Fed rate hike sometime in the very near future. Whether that happens in December, January, or March is still a question, although signs point to December. If the dollar strengthens further, given the changes around the world, the Fed will probably still be willing to get away from zero and live with a stronger dollar.
To sum this up, events in Paris are tragic. Our leaders need to focus on the fact that we are at war with an enemy, with actual men and women who shoot. We must shoot back. We are not at war with concepts (isms). Our financial markets are now focused on the outcome of these war events. With that outcome unfolding, markets will experience lower interest rates for longer and reduced inflationary tendencies. Therefore they reacted as they did on Monday, following a very bloody and surprisingly shocking weekend in Paris.
We will end this commentary with an excerpt from a piece we wrote a little over 14 years ago. We could have written the same sort of comments had the Paris attacks occurred last month when we were in France.
In Paris, I typically log 15,000 steps a day. I’ve walked the areas that have made news. They are quite familiar. Last month I actually traversed the spot where the shooter killed at Les Halles. My personal sentiments from fourteen years ago are similar to those I experience today.
Below is an excerpt from “Today Started at the World Trade Center.” It was published in the early evening of September 11, 2001.
I have just reached my desk. At 8:30 this morning I was seated with others in the WTC Marriott ballroom, listening to a speaker. We heard the sound. We felt the shock of the first impact. The lights flickered. People moved quickly and orderly.
Two hundred fifty of my friends and NABE colleagues and many of their family members were in that hotel and in that breakfast meeting. I fear for them; they are in my hopes and prayers.
I also fear for the many on the street that I saw and helped and who helped me. I am lucky to be alive and am also lucky to have been able to get out of New York. That is a separate story. I am now at my desk in Vineland.
This human disaster is powerful and horrible, all the more so when you actually stand on the street, see and smell the smoke and aid an injured or frightened person or watch someone jump from 80 stories. Whatever you see on TV is 1000 times more intense in person.
The human spirit is also quite strong. I saw many strangers helping each other. I did it, and others did for me. People calming others. People saying walk, don’t run. People holding up others so they wouldn’t fall.
There are large numbers of heroes. Police and fire and emergency folks and so many others, like the doorman who showed folks a way out. Or the hotel staffer who stood her post and got others to exit and move far from the building before she left.
A few have already asked about financial markets. It is a question that naturally comes, but we must readily admit that the question really evokes a portion of pain. The human tragedy is immense. So many innocents are dead or injured. Money is dwarfed by this suffering.
Many more asked about my safety. I want to personally thank them. I’m a little shaken but okay. On the other hand, I – no, we – have suffered much painful loss.