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Burning Down the House—Madame Le Pen Discovers Gresham’s Law


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Sir Thomas Gresham was a banker in the 1500s. The law that bears his name states that, “Bad money drives out good.” In a commodity, currency-based economy, if two currencies are introduced (and the rule of law accepts both at the same value), but one has more of a commodity attached to it (like silver or gold), people will hoard this “good” currency and pay their debts with the “bad” one. Apparently, Sir Thomas was called upon by Queen Elizabeth I to explain this theory because of what was happening to the English shilling. It turned out that her father, King Henry VIII, debased the shilling by putting less silver into it in order to pay the monarchy’s debts easier. Eventually, people started hoarding the coins with greater silver content, reducing the money supply and creating whatever they called a recession back then. The plan worked great for King Henry, while not so much for Queen Elizabeth!

In France, National Front leader Marine Le Pen issued a long manifesto of sorts (144 “commitments”) over the weekend, which indicates she’s had enough of the European Union and the common currency. She wants to replace the euro with a basket of European Union currencies, similar to what Europe had in the years immediately leading up to the single common currency, the euro. In a recent article, Bloomberg News reported:

“On becoming president, Le Pen would immediately call for a summit of European Union leaders and the European Central Bank where she would ask euro members to replace the single currency with a basket of new national currencies comparable to the European Currency Unit or ECU, which preceded the euro. France’s currency would probably be called the “new French franc” and it would initially be equivalent to the euro, Monot said. The French state would pledge to limit its fluctuations against the EU currency basket to a maximum of 20 percent, though Monot said movement up to 10 percent would be more normal. There’s no timetable as yet for introducing the new currency and if the other euro nations decline to adopt their national currencies again, then the new franc would float freely.”

Who is this fellow Monot, you might be asking? Bernard Monot is Le Penn’s key advisor. Mr. Monot is the literal “man with the plan.” More from the Bloomberg News article:

“I don’t think it will be a catastrophe because France is after all a major country and people will understand soon enough that we are working as patriots to restore France’s sovereignty,” Monot said in an interview. “If there is a catastrophe, I have a plan—it’s in here,” he added, pointing to his head.

Part of Monot’s plan (this is plan A; plan B is “in his head”) is to re-denominate France’s sovereign debt in this new currency, which will “help” France considering that their current debt load is 96% of its GDP. Currently, France can borrow 10-year money at about 1.13%. After re-denominating its debt, assuming this is actually legal, the new borrowing rate will be somewhat higher. Maybe a little more than “somewhat higher.” Moreover, assuming that the European Union is still around after a scenario where Ms. Le Pen wins in April, the European Central Bank probably won’t be buying France’s debt under its Quantitative Easing program, so that will make France’s borrowing costs even higher.

While Gresham’s law pertains to currencies backed by commodities (like silver or gold), the effect of introducing the “new French franc” into the French economy would drive the euro out, literally. Those who are net borrowers of euros in France, like the French government, would be helped while those who are euro creditors or owners of euro assets in France would be harmed and harmed greatly, I imagine. I don’t think the latter group will wait around to see what happens either. Capital will fly out of the country, destabilizing both France and the rest of the European continent.

Currently, the “experts” say that Ms. Le Pen can’t win the premiership. She might win the early round, but it won’t be enough to win the whole thing, they say. I think by now we know to take what the political experts say and do with a grain of salt. Does anyone really think the risk markets have priced in even a 10% probability of Ms. Le Pen winning and doing exactly what she says she is going to do? The election is this April. You may want to skip “Paris in the Spring” this year.

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