The Grand Illusion

The Grand Illusion

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By Robert Rotella, CEO, Rotella Capital Management, Inc.

Norman Angell may not be a household name but perhaps he should be. He was born in England and then immigrated to the United States working at myriad odd jobs such as cowboy, ditch digger, and newspaper reporter. He then returned to England where he won a seat in Parliament and a Nobel Peace Prize. He also wrote an important but relatively obscure book in 1909 entitled The Great Illusion.

When the book appeared World War I was looming on the horizon in Europe. Angell argued that no nation would benefit economically from the disastrous consequences of war in Europe. The prevailing thought at the time was that the conquering nation “won” a war and in the process acquired more wealth and power. This was sometimes the case in the past because nations were more independent and did not rely on each other as trading partners.

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However Angell realized that times had changed and saw things differently. He theorized that nations were more interconnected, relying on each other for trade and credit, and therefore war amongst nations would be disastrous for both the vanquished and the victor. To annex one territory would not make the conqueror any richer (indeed both nations would likely be poorer) because committing resources for war as well as the destruction involved and the necessary rebuilding would be far more costly than whatever was gained.

Critics derided Angell’s idea with the onslaught of World War I. However he never suggested war could not happen but that it was futile. Sadly World Wars I and II proved him correct. Indeed his idea lived on and was one of the core reasons in forming the European Union. The European Union website ( states: “The EU was created in the aftermath of the Second World War. The first steps were to foster economic cooperation: the idea being that countries who trade with one another become economically interdependent and so more likely to avoid conflict.” That sounds a lot like Angell’s idea to me.

But if war is futile then the question remained: Why does it happen? Smedley Butler, like Angell, is hardly a household name but he tried to answer this question. He was a military hero serving in the United States Marine Corp from 1899 to 1931 attaining the highest rank at the time of Major General. He saw firsthand the ravages and consequences of war. He wrote an obscure book in 1935 entitled War Is a Racket and its first two paragraphs are some of the most powerful of any book written:

War is a racket. It always has been. It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives.

A racket is best described, I believe, as something that is not what it seems to the majority of the people. Only a small ‘inside’ group knows what it is about. It is conducted for the benefit of the very few, at the expense of the very many. Out of war a few people make huge fortunes. (Butler, 1935, 2003, p. 23)

Perhaps there are some “good” wars where the majority of people benefit from the aftermath of the carnage. The American Revolutionary War comes to mind where some of the most brilliant and courageous minds fought to promote ideals of liberty and in the process created one of the greatest nations the world has seen. Unfortunately these examples are more the exception than the rule.

The 1937 French film The Grand Illusion directed by Jean Renoir took its title from Angell’s book and is considered by some to be one of the greatest films ever made. The film presents the futility of war and shows how varying interests have different reasons to promote or prevent war. Ironically Angell’s book appeared a few years before World War I whereas Butler’s book and Renoir’s film appeared on the eve of World War II.

Is the Grand Illusion proposed by Angell, Butler, and Renoir relevant today and furthermore what does this have to do with markets? I believe a lot. The markets have periods of optimism and pessimism which can be illusory and ultimately require a reset by reality. There are many illusions which I intend to mention in future articles but for now let’s consider two, the first dealing with the EU.

As mentioned earlier one of the initial enlightened goals of the EU was to reduce the threat of war through more interdependence among member nations. However in the ensuing years this has changed from fostering peace and economic growth to significant supranational control of each country’s policies. Each member nation is now losing its sovereignty in exchange for some possible economic benefits. Does Brussels really know better than Athens what is best for Greece?

The second case is the United States. The Cold War pitted the U.S. and capitalism against the evil empire of the Soviet Union and communism. Many sacrificed their lives in both the Korean and Vietnam Wars as a consequence. However we all know the West won the Cold War as capitalism triumphed over communism with the fall of the Berlin Wall and subsequent dissolution of the Soviet Union. The world became a freer place. Well not quite. Cultural and economic Marxism are still alive and well having moved from Moscow to Washington, DC, Brussels, and the halls of most universities in the West. Russia is still the evil empire even though it has abandoned communism and tried to adopt capitalism. Was the Cold War ever really about ideology?

The EU was created to prevent war but has morphed into a supranational entity with quite different agendas than its original stated purpose. The Pax Americana of the U.S. is yet another supranational agenda that has gone far beyond the ideas of the Declaration of Independence.

But wait. I thought one of the main reasons for World War II was to avoid each country losing its sovereign rights to a higher authority. Will the supranational policies of the EU and U.S., supposedly designed to promote peace and better the world, create the opposite effect? As we continue to waste resources and foster Marxism the world economies will flounder and eventually collapse. And fed by the mainstream press the Grand Illusion Bubble will eventually face reality and burst as well.

We shall end opposite to where we began. But sometimes that’s the way things work. The poet T.S. Eliot was born in the U.S. and immigrated and became a citizen of England. I have always been puzzled by one of his verses but perhaps have finally begun to understand it: “Humankind cannot bear very much reality.”

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