Why USA needs more social services

According to the theory of most US tea party conservatives countries like Germany, Denmark, Sweden or Finland  should be in deep trouble. Almost 50% of the government expenses go to all kinds of  social plans for elderly, jobless, children, free eduation for students etc. This is topped by the expenses for health insurance and pensions. The German banks earn a lot of money too but their percentage of the GNP is much smaller than in the USA.

Now comes the financial crisis. The poor people in the advanced “socialist” European countries still get their monthly paycheck, which stabilizes the local businesses and provides a basic protection against depression. The large expenses for social programs has forced the enterprises in  “socialized” European countries to increase their productivity. Frankly spoken it is financially more attractive for these countries to pay people for not being employed instead of supporting low quality workplaces in the industry. Certainly this is sad for people which are no longer needed by the industry. However, it is better to accept the facts and look for new ways of employment for these people. Denmark and Sweden are probably most advanced in this process and employ people not needed in the industrial world in community  jobs.

USA is on different track. The US society has decided to allow a small group of people in the banking and investment arena to rake in the money generated by pension funds and printed by government. Only a very small amount of this money is actually going into consumption and to pay people for community  services. This surplus money is moved around to worldwide virtual businesses providing no real value to the American people. Since it is so much easier to earn private money with virtual banking business, USA has neglected its industrial base especially the small and medium businesses.

However, there is a chance to turn this around. As soon as the financial crowd fears that all their virtual money is endangered they will try to acquire real assets e.g. they even buy the share of the new General Motors. Unfortunately they will find more good opportunities in the stable European countries and in emerging markets in the East than in the eroded industrial landscape in USA.

Housing – you did not lose real money!

With the housing prices coming down people are complaining about the amount of money they have lost. This is really not true – you only lost virtual money.  When you sell your home you will be able to buy a similiar home with the money you get. No reason to complain. However, if you planned to sell your home for the inflated prices of two years ago you will probably have a problem.

How to kill the virtual money – It’s easy and partly done

In my blog entry from January 29, 2009 I wondered, how the huge amount of virtual money e.g. generated by inflated prices of housing, could be killed.  This turned out to be rather easy. US citizens have lost billions of virtual money when the housing prices came down to their real value and there is not much hope that they will go up again. However, there is still a lot of virtual money mainly in all kinds of banking and insurance “products”. Their value is down or will get down soon too. However, it is not so obvious because people dont post signs in their front yard showing the real value of their investments. If you thought you could rely on this virtual money to finance your retirement you are probably up to  a simple quite life.

The next Madoffania – Pension Funds

All over the world honest people, companies and state agencies have transferred lots of money to pension funds, life insurance or social security systems. USA are expecially proud of their mostly capital based pension plans whereas Europe is relying at least for basic pensions to “socialistic” plans where todays workers are paying for the retirees. Both methods work quite well with a growing population and as long as enough capital is flowing to the system to pay the current generation of retirees. Things get immediately difficult when the payouts exceed the pay-in. Apparently both USA and most countries in Europe are approaching or already have surpassed this tipping point.

Most people think that their pension money is parked securely , produces reasonable cash flow and enough money can be withdrawn if required. However, this is certainly not true. As soon as large pension funds try to sell their assets prices will go down dramatically and very often they will find that the assets are not worth their booked value. (remember Mr. Madoff!).  No wonder, when generations of insurance agents and finance experts have feasted on your money. If you plan to retire in the next couple of years you better think about downsizing right now! If you are young and plan to transfer money for the next thirty years to a pension fund you should think twice about your chances to get the money back when you retire.

The retirement trap – are people saving too much?

In his article “Revenge of the Glut”, Paul Bernanke points out that WW people are saving lots of money which they try to secure in “safe” countries like US or the big European countries. Thus these countries especially the USA are flooded with cheap money creating a huge trade deficit.  A good example of “saving countries” are Japan, China or Germany, where people are traditionally saving a large part of their earnings to be prepared for hard times. In good old days this money was used by farmers, entrepreneurs and large companies to finance profitable investments. Today even large excellent companies like IBM don’t have lots of ideas how they could create profitable new business. Most of the IBM profits was spent in 2007 on share repurchase ($ 18.8b share repurchase versus $6.2b for R&D) . As a result IBM much like other big businesses did not grow as analysts expected in the 1990s.  Developing countries could absorb huge investments. However, they do not have to infrastructure to invest and maintain the assets providing reliable return to the investors. USA is still one of the most interesting targets when people want to secure money for the future although US was consuming much of the incoming capital flow in the past.  However, people do not believe anymore that they will get their money back when they need it e.g. for their retirement. In addition the amount of money people need for retirement is growing fast because people live longer, healthcare cost are exploding and companies do not provide pension plans (financed out of cash flow) for their employees anymore.  This is one major reason why people gave their money to banksters promising high revenue.

Now even middle class people must realize that they will not be able to make enough secure investments to maintain their lifestyle during 25 + years of retirement. The only viable solution is probably to scale back much like our grandfathers and grandmothers did.  You must not be a member of a expensive golf club, you don’t need an expensive house in an affluent area, youd don’t need expensive vacations etc.  I even think that our ancestors were happier with their modest style of living growing their vegetables in the backyard than today’s retiree’s. Unfortunately this attitude will decrease the GNP because consumer spending in an aging population will decline. Is there any reason why a wealthy country should not be able to manage such a change?   The answer is probably – yes. we can.

Rebuilding the country by reallocation of intellect

The high salaries and boni of the financial industry have attracted many bright people in all countries, resulting in an intellectual drain in engineering, government or education. Tthe “leading” countries in the financial crisis USA und UK   have also taken the hardest hit. Unlike in the dot.com boom in the 90″s (which has also attracted the bright young people) which created at least some new business models and corporations like Amazon, eBay or Google there is no hope that the large amount of skilled people in the financial sector will create new assets for the society. There is even a danger that these people making their living on fraud and illegal business models will apply their “skills” to other industries! The intellectual skills of the nations must be redirected to support the real businesses and the creation of new values in the real industry. In a first step government must reduce the influence of consultants from the banking industry and the associated lawyers. President-eElect Obama seems to take the first steps in this direction.

Forget the S.E.C. – watch out for the Russian oligarchs

Bernard Madoff must not be afraid of the S.E.C  or the U.S. procesutors even after after a 50 B $ fraud. The procesutors are rather helpfull for not allowing Mr. Madoff to leave his comfortable NY apartment.He rather should be afraid of a couple Russian oligarchs spending more than 2 B$ on Bernie’s Ponzi enterprise thru Ms Sonja Kohn in Austria. Ms Kohn already decided to hide in a secret place for good reason.   Maybe the S.E.C should hire a few consultants from Russia.

German billionaire Adolf Merckle commits suicide

Adolf Merckle, a German selfmade billionaire ranking #44 in the Forbes Billionaires list, committed suicide on January 6th, 2009 throwinfg himself in front of a train. After wild speculations with buyouts of companies and a recent one billion €  loss on short selling of Volkswagen shares, he was forced to turn over his “imperium” to the banks. Unfortunately he did not run a bank by himself. Thus he could not get government guarantees for his bad loans.

Adolf Merckle was a typical “tough” manager playing tricks on various legal borderlines to acquire a wide various companies which employ nearly 100 000 people. One of his hobbies was to buy forest from the peerage of Germany, running in financial troubles.  In some parts of Southern Germany 40% ofthe forest was owned by Adlof Merckle.  Certainly the crash of his enterprise was a major rason for committing suicide. However, another reason was that none of his four sons was willing to take over the family business  and work in the same “style” as the father. One of his sons dropped out of the family business  and declared only to work for “real” value with his part of the family fortune. Certainly Adolf Merckle found managers willing to work the same style as the company owner finally resulting in the crash of his whole Merckle empire. Although Adolf Merckle’s suicide is probably the most spectucular suicide as a result of the financial crisis it is not the first and probably not the last .  There are other similiar suicides in the finance world e.g. in the UK.  In contrast live seems to be easier in the US. e.g. Bernard Madoff seems to plan a restart with his and his wives family jewels although his fraud caused at least the suicide of Rene-Thierry Magon de Villehucher, a french aristocrat.

.

New opportunities for fiddlers

As people become more cautious about their investments in virtual banking products the great boni of the bankers for cashing in money from the street seem to be over. However, there is always money on the table for tricky bankers. The banking lobby and the experts in consulting have convinced the government to spend the money of the people for them. Now there are gresat opportunities to grab a good portion of the 700 Billion $ bailout pot without serious work. Again Great Times for fiddlers.Things get even worse for the working class because they have no chance to control where the money is spent. In the last banking crash you could decide by yourself wether you participate or not. My standard question “Please explain in three sentences why you could care better for my money than me”" was very helpfull when dealing with financial advisers. But now government is decisiding where my money will go. I am just an “anonymous workaholic” providing tax money which is joyfully spent by the people which got us in the current trouble.

Roots of the Evil – The Great Crash 1873

Bankers and politicians declare in millions of interviews and press statements that the current banking crisis is something totally new and nobody could predict it. This is certainly not true (much like the other stuff your banker is telling you) . The great crash in 1873 in Germany was just one of many starting points of the great depression hitting Europe in 1929.

• The first common problem between 1873 and the current crisis was deregulation. Starting with a law in1870 which allowed creating banks and  public companies without any strings attached. As a result 107 banks and 928 public companies were founded between 1871 and 1873.  Everybody could found a bank and collect money from the public.
• The second problem was short term. massive supply of money (3 times the GNP of Germany) mainly coming from France, after France lost the war 1871.  However, the money was flowing only for a very short time.
• The third common problem was the explosion of the real estate market. Profits of 600% per year were possible. Most of the long term real estate investments was financed with short financing contracts.  Today you still can see a lot of big buildings from the “Gründerzeit”.  Brick and Mortar lasted but the money of the investors was gone.
• The fourth problem was the huge amount of “fake” and overvalued shares. Even in 1870 the Germans bought American railway shares which soon became worthless. One company was even selling shares successfully for a “moon to earth” railway system.
• The fifth problem was a major change in technology. With the exploitation of steam engines to the production and transportation of wheat from USA and barley from Russia. The German farmers were no longer competitive – export of grain declined dramatically (much like export of cars or import of goods from China today).
• The sixth problem was that more and more people could not make their living anymore in the countryside. Thus people moved to the cities and lived in slums.
• Much like today everybody was playing the financial poker game. The game ended when the Rothschild Bank collapsed in May 1873 (the Lehman Brothers of 1873).

I guess that’s enough material to think about!

Recommended reading: Die Wurzeln des Bösen [The Roots of Evil] by Massimo Ferrari Zumbini