Where is all the money gone II ?

The decline in the worlwide stock markets is an indicator where most of the money raised with the housing loan scheme was flowing. Banks and large investors (also Warren Buffet) used the “virtual money”  to buy into real companies. Warren Buffet invested heavily e.g. in good, old fashioned tool and equipment manufacturers (Warren was investing heavily in insurance companies initially!) . The surplus of money helped to raise the price of stock. A common trick was e.g. to opt for large amount of shares of a company in the future for a high price. The risk was not very high because there was enough money around and the price of the shares went up anyhow.. With this trick the Porsche family in Germany e.g. bought the huge company Volkswagen with a minimum amount of own money. Now with the surplus money gone all the “future shares” are going sour. The banks, insurance companies, pension funds and large investors don’t have the money to fulfill their contracts and will create huge losses if they buy the shares at the price they promised.

Thus the “virtual money” in the overpriced stock markets is going to disappear. Bad luck if you personally have invested in the overpriced stock. Your “real money” does not disappear – it just shows up in other people’s banking account. 

Where is all the money gone?

Two interesting question are coming up with the crisis in American banking getting bigger and bigger. Where did all the money spent come from – and where did all this money go? The first question is rather easy to answer because most banks involved in the deals show huge losses. Not only US banks and their shareholders are hit but also large banks worldwide which bought some of the ‘risks’ from the US banks. Strange – would you ever consider to buy risks? The banks and their employees got high bonuses for every transaction and constructed business cases where they would get high interest rates on their investments in the future. Just a little detail – the people supposed to pay these interest rates did not have any money. I guess most US bankers involved in these deals knew about this little detail. A senior insurance banker in Germany got fired because he did not march with the crowd and refused to buy the “high return “US certificates offered by the US banks! (No they did not call him back after the crash!)

With the housing bubble exploding a large number of US and foreign banks and their shareholders have lost so much capital, that they must get fresh money from the outside – very often from government owned investment companies in the Far East.  Thus substantial parts of the western banking structure is going to be owned by foreigners. In Germany about 53% of the shares cross industry are already owned by foreigners. Now US is experiencing a “sale” of its industry too.  This has an interesting side effect on politics. Increasing the profits of the share holders – a classical republican strategy – does not help the country very much. The money is going to the overseas investors! From a historical perspective the former slaves are coming back to the US and buy the masters to work for them – late revenge.

More difficult is the question where all this money is now? First of all the largest amount of this money was virtual and never there – it was just showing up in the books of the banks. However, there was still a lot of money flowing. Part of that money went to the US housing and construction industry. Even some workers may have participated!  Housing investments and the associated employment is an important measure for the well being of US nation. Therefore government did everything to support the lousy schemes.

A small  part of the money went to bankers for successfully handling transactions. The trick in banking is really not to sell you a loan once but to reshape and redefine it such that the loan can be sold ten times! Thus the number of transcations and the associated fees can be increased almost without limit. Today they don’t sell gold or oil but gold and oil futures – again virtual goods. However, foreign investors will not take the bait again. They will not pour money down the US drains. Increasing exports will also not be very helpfull because the $ has lost so much of its value. Thus US will have a major problem to get easy money for consumption from the outside as in the past. Where will George Bush take the money to give out to the people before the election? A good old tradition started in ancient Rome with the tax money taking from other countries.

My guess is that that this time it will be taken out of the US citizens pocket and not be taken from foreign investors as in the past. May be Mr. Bernanke will give out some virtual money to help but this will decrease the value of the money US citizens have in their pocket. But sure the bankers will be paid to give out money at the desk and cashing it in at the back door.   

How to help the people in Third World

USA has basically four methods to help the people in poor underdeveloped countries: 

• Sending missionaries especially from angelican churches 
• Sending military
• Sending peace corps members  
• Sending money

Recently all four methods seem not to work e.g. Israel, Pakistan, Irak … . What the people in these poor countries really need is help from experts according to their needs and a secure environment where these experts can work with the people. Bringing in inexperienced people is really not very helpfull. Germany for instance concentrates on sending a few experts which really can attack the major problems of the poor – water, health and education. However, very often political leaders in the third world countries prefer aid with money they can move to their personal accounts and boycott the real usefull help. We should not support this behavior regardless how much oil or gas is available in such countries.   

Corruption kills democracy worldwide

A lot of people would agree that democracy is probably the best way to organize a society. The USA has been using “democracy” aggressively e.g. through the Albert Einstein Institute (a rather strange name!) to “americanize” the world and more recently to enlarge the playground for american companies. In some countries this was successfull e.g. the conversion of Germany into a democratic society after world war II. However, more recently this strategy does not work anymore. If a politician is supported by the USA, he is very likely not very successfull in his country – Benazir Bhutto is the latest sad victim of the US “rule the waves” strategy. 

Almost every country including Russia is now claiming to be a democratic state with regular elections. However, elections are a favorite playground for manipulation. Even in the US the nomination of representatives at any political level is a battleground of special interest and pressure groups. Political campaings are typically not financed for love. The donors want their money back – a typical sign of corruption. The politics of George Bush was much more influenced by his “friends” and political supporters from the US oil industry than by the people of the USA. Very often the manipulation is through the nomination of candidates. Most countries have obscure processes to nominate the political representatives. People can only vote for representatives they really don’t like. The process in USA is rather strange for Europeans but seems to work in the Internet age, where the power of big money paying for TV time and newspaper ads has been broken. 

In the more developed countries corruption is more subtle whereas in most emerging countries huge amounts of public money are diverted to private accounts. Russia is probably the worst example where almost all property owned by the people in the age of communism is now controlled by private clans. Nevertheless 108 % of the people in Moldavia voted pro Putin in the latest election! (The communist never could get more than 100 % of the votes.) The key to the success of Jomo Kenyatta in Kenya was that he really fought corruption and brought peace and prosperity to the people of Kenya. The current uproar in Kenya is due to the fact, that the todays leaders are not following the path of Jomo Kenyatta.

Corruption in emerging countries is mostly fed indirectly by money from US, Europe and more recently China. By not giving money to corrupt politicians and by not allowing them to manipulate elections we can help the people in the emerging countries probably more than with political initiatives.