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 Russion 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.

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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

Where do the bankers spend the government money?

US government was more than eager to provide 700 B$ for the criminal failure of the banking industry. In contrast the US senate is not willing to support the automotive industry with a couple of billion dollars. The reason is pretty simple – everybody who looks at a car of GM, Ford and Chrysler can easily see that their cars are not competitive. The banking products secured by the huge government loans and guarantees are not competitive either. However, because most people including politicians know much less about banking than cars, they willingly follow the banking managers. The “new” money given by government to the banks will first be used to get rid of banking employees with amazingly high salaries. The average salary at a typical German investsment bank was about 700 k$ including clerks and secretaries. US bankers commanded much higher salaries. Now most of these people are laid off with a nice handout of two to three times their yearly salary. Now it turns out that the profits they showed in the past were virtual but the bonusses they cashed in were very real. For sure ese golden handshakes are paid by the taxpayer. The poor workers at GM, Ford and Chrysler will probably not see golden handshakes when they are laid off.

Interesting to note, what bankers are doing right now with their money. They do not longer buy “banking products” or expensive and overprized real estate but try to convert their private robbed money to real assets. They now shop around and buy small and midsize companies with real assets. It comes handy that the bankers have cut the money supplies of smaller companies and got them into financial trouble . The bankers know very well which companies have a solid undervalued business.. Now you can buy good real economy companies for much less money than a year ago. Financing these deals is rather easy because they pay almost no interest on money they need to finance the deals. It would be a surprise of all the tricky guys in the banking industry would be converted within weeks after the financial saints. They are still out there and cash in your money thru government which is much easer than getting it directly from you!  Probably only Saint Anthony can help: “Saint Anthony, Saint Anthony, please come around. Something is lost and cannot be found.”

Fiddlers always survive

Typical for every crisis is, that the guys who caused it are not really hit. A good example are the communist leaders of the German Democratic Republic which went bancrupt in 1989 and was “bought” by the the Federal Republic of Germany much like  bancrupt banks are bought now by government. The most important subject during the reunion negotiations was how the the salaries and pensions of the communist leaders are secured after the breakdown of the country.  These crooks now receive “Salaries and Pensions of Honor” much like ministers and government employees in the West. Guess what will be the most important subject when the government takes over the control of banks?

Why Europe should help the US in the financial crisis

Although most of the worldwide fincial crisises from 1929 to today have started and were rooted in the US, Europeans were always playing the game too by pumping their customers money to the US in return for the promises of higher profits. Thus it is only fair the Europe takes a fair share of the financial hits. People in Europe should also be reminded that the the US was financing with the Marshall Plan the broken economies in Europe after World War II, although the US was really not to blame for it. This is a good example how all involved parties can benefit from financial support in difficult times.

Why we should not save the banking systems

The current wordlwide banking system has created a world of virtual money, which is not backed by real products and real money. Its whole purpose and was to take real money from hard working people to reward the people involved in the schemes. We should not pump additional money in this wrotten fraud based industry. However, we should spend money to protect the real economy and the people. Just a simple example: government should not back the bad housing loans of the banks but should help the people to reevalute their house (probably very often only 50 % of the assumed price) to allow them to pay back their mortgages on the reduced value with their regular income. This would also reduce the property taxes which people no longer can afford. Certainly this would cut the profits from loans in half. However, this would help the people and maintain the current system. Certainly the banking system would have to take the hit by eliminating the amount of virtual money floating around, which must by the major goal of any reform to the banking system.

The proposed scheme is applicable not only in the US but also in UK, Spain, Ireland, Iceland etc where tons of bad housing loans are floating around much like in USA.

PS 1/3/2009  The NY Times article “How to repair a broken financial world” by Michael Lewis and David Einhorn describes the proposed method in more elaborate words.  Thanks.