Greece Gets Greased and Portugal is Galling

A Currencies Comparison.

A chart of various currencies

FXE - the Euro, vs GLD gold, and other currencies

FXE – Euro
GLD – Gold
FXB – British Pound
FXY – Yen
FXF – Swiss Franc
FXM – Mexican Peso
FXS – Swedish Krona
BZF – Brazilian Real
FXC – Canadian Dollar
FXA – Australian Dollar

All versus the US Dollar.

OK, So What’s This Mean to Me?

Greece has just had their “Sovereign Debt” downgraded to Junk. ( I think that puts them about the same as Romania and below Hungary and Iceland; if CNBC World has it right and I heard it right…)

Furthermore, Portugal was downgraded 2 steps.

Germany is balking at bailing out Greece, and the IMF (International Monetary Fund – the global banker) is posturing for a bailout, but with major strings attached.

This, as they say, is a mess.

Why?

First off, it means investing in Greece or Portugal is a really bad idea right now. We’re talking something like 85 Billion Euro (up to 150 Billion over a couple of years) that Greece needs to pay back, and it doesn’t have it. So they want to borrow 45 Billion or so right now, more later. And the folks who have been prudent with their spending are not so sure it ought to be their problem to bail out Greece.

Portugal is not quite as bad off right now, but have a hung parliament and can’t get themselves to take any action.

This could put the entire Euro currency system under more stress and potentially put it into jeopardy. Traditionally, when a sovereign country is hosed from over spending, they bugger their currency by printing more of it. In the Euro system, Greece can’t do that. They MUST either raise taxes or cut spending. In socialist systems, neither of those are politically possible. (Thus the hung parliament in Portugal…) Telling the government employee unions that they get a pay cut usually results in domestic paralysis as they go on strike.

Greece could leave the Euro (a lousy choice) or default on its debt (a worse choice) or just stop functioning (as they have done in the past… with riots et. al.) or a White Knight could come from somewhere with a rescue package and kick the can down the road a year or two (the most positive choice but unlikely unless Germany decides to pony up the money – and the German voter is sounding a bit tired about pick pockets…)

This is, at best, a mess.

Most likely Gold and the Yen will rise, along with the Swiss Franc. Expect the European stock markets in general to show softness for the next couple of weeks.

The Future

We will have more of this to come. The Urge to Spend, especially in “Social Democracies”, and especially on “social programs” is unstoppable. It ends in stagnation, social collapses, buggered currencies, revolution, and eventually poverty. In this case, with a shared Euro, Greece can not inflate the currency on its own. But with so many European countries chaffing under the yoke of German Banking Discipline, we might well see a consensus arise to let the Euro slide. Even if the Euro does not eventually slide a lot, the fear of it will cause a sagging of the Euro debt market and Euro stocks. Time to be short Europe and short Euros.

It will be ‘dicey’ for a week or two until we get a better idea what’s happening. Realize that the Euro has already slid from about $1.50 / Euro to the $1.32 / Euro level, so don’t be surprised if there is a bit of jump for a day, then the next stage of decline begins. A $1.20 / Euro level is probably about right, but Europe will be reluctant to let that happen and expect to see central bank interventions. It’s just going to be unstable and unpredictable from time to time.

The USA

What does this mean for the USA?

Plenty.

We are headed down the same road. California is already there (as are several other states) with a worse debt position and a larger economy than Greece. The Federal government is spending at a pace that makes Greece and Portugal combined look like nothing. We are spending $Trillions on social programs we can not fund.

Greece spent money it did not have on social programs it could not afford with growth of government and large union pay outs.

The USA is spending money it does not have on social programs is can not afford with growth of government and large union pay outs.

Want to know what the future holds for the USA? Watch Greece. They are only a couple of years ahead of us. Our “sovereign debt”, the US Treasury Bills, Notes, and Bonds can suffer the same fate of a downgrade. We are not immune.

The major difference is that the USA can simply print more money and dilute the value of all outstanding currencies and debt. I expect that is what we will do. Simply inflate away the debt. It takes no vote, requires no one agree, needs no money to be loaned by a reluctant partner, and works without the public noticing for a few years. (It takes about 4 to 6 years for inflation pressures to build up and work their way through to the general price level. More than enough time to blame it on someone else…)

Where to Go?

Asia and the resource countries. Japan, China, South Korea. Perhaps India. On the resource side the Australian Dollar and the Brazilian Real; plus both of their stock markets. Canada and Mexico are worth a look, but coupled to the US markets a bit more than the others. Minor markets with stable economies (New Zealand, Israel, Chile, etc.)

Long China, Australia, Brazil with a Short Euro and European stocks against it ought to be a win. Maybe not in a single day, but over a couple of weeks. There is risk that Germany could bail out Greece and the positions move against you, so have stop loss orders or watch the news and be ready to move fast.

The Ministry of Stupidity Speaks

Also today we had the US Congress grilling Goldman Sachs over their trading of mortgage backed securities. All political theatre to pave the way from some kind of “Finance Reform” bill Real Soon Now. That will leave USA markets unsettled for a while. Avoid them. ( And you just KNOW they will not simply put back the Glass-Steagall act that they stupidly repealed. Hey, just because it worked for a generation or two… and just because we had a financial meltdown after it was repealed… To “put it back” would require admitting they screwed the pooch in the first place. Whatever they do will be far far worse.

When The Ministry of Stupidity Speaks, all you can do is run away. Step away from the table, take your chips and go home. Wait until the dust settles and you know what the new rules will be.

Avoid the US Financial Sector and be reluctant to be in the general US market. Positions have to be twice as promising to make up for the added political risk of “Congress in Session and the Ministry of Stupidity on Parade”…

FWIW, I’m continuing to hold my oil trusts and other high dividend paying resource positions. Defensive. It’s time to be defensive. Even the good markets (long term) can take a dive with this much bad news in the news flow. So watch fast charts for an entry with new chash and don’t just sit in positions that are falling.

You want things with high intrinsic value, stable rules and stable valuations, preferably with some dividends, and the lowest political risk you can find.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money and tagged , . Bookmark the permalink.

24 Responses to Greece Gets Greased and Portugal is Galling

  1. E.M.Smith says:

    Spain got a downgrade today too…

    Looks like all those “Green Jobs” are not quite getting it done for Spain…

  2. Luís says:

    Hello Michael,

    You have a limited understanding of the problems Europe (or more specifically the Eurozone) is facing at the moment, as anyone who tries to understand Europe reading British or US media.

    To make a longer story short we don’t have an European Treasury, that’s the root of all evil right now. The skepticism on outrigh bailout is prefectly understandable but at the moment there’s nothing else that can be done in practice. This is the result of the long reluctancy to properly build the federal strucutres needed to run a Federation. Absent are also the mechanisms to uniformize budget execution, but that’s another story.

    The Urge to Spend, especially in “Social Democracies”, and especially on “social programs” is unstoppable. It ends in stagnation, social collapses, buggered currencies, revolution, and eventually poverty.

    This is an enimagtic assertion, given that those states with traditionally weaker social programmes are the ones in trouble right now.

    While a devaluation of the euro is pretty much a given fact, this will be visible mostly against commodities (especially oil and gas) and hard currencies like gold. Agaisnt the US$ the fundamentals simply aren’t there for further devaluation; long term a correction shall develop.

    Don’t expect any debt rating cut for the US, if that hasn’t been done so far, it never will. The agencies responsible for these ratings follow their own agends in disregard of fundamentals; the budgetary situation in the US has been far worse than in Portugal or Spain for quite some time.

    After the North-Rhine/Westfalia elections the shortened version of the Council, comprising only the Eurogroup leaders, shall reunite and come up with some knee-jerk solution as usual, leaving the proper institutional reform once again for later.

    Regards.

  3. Dave McK says:

    Our calculations agree, Mr. Smith. Obama will reward our Canadian investment substantially (on paper, we’re up about $7500 now).

    Most of the foreseeable is straight Adam Smith. I’ve had my eyes on the boomer demographic- whenever that many people want to do anything at the same time it churns up the change.

    I see the big bailout for the USA that they’re counting on –
    the standard of living is a simple ratio: wealth/capita.
    That ratio changes by altering either numerator or denominator.
    Honest folks seek to raise the numerator.

    Wars don’t do very much about denominators these days; they always have reduced the numerator.

    China is going t be very interesting. A generation of individuals will come to exist who have no families, no living relatives closer than a cousin. There will be a shortage of females. The cards portend an abrupt and precipitous drop in the denominator in @ 30 years or so. Many wealthy individuals will emigrate and disperse. The USA has the 76 million boomers who presently begin to retire. Within a few decades, then, the USA denominator has a precipitous drop.

    So @ 10% of GenX future inheritance has been spent this year. The USD is supported in the long term by that.

  4. Peter Offenhartz says:

    Before critiqueing US gvt expenditures, know at least this much:1. US federal govt costs ca 20% of GDP; 2. Military costs 20 % of govt, or 4% of GDP. 3. SSA is also 4% of GDP. 4. Medicare is 3% of GDP. 5. Welfare is 3% of GDP. 6. Interest on debt is 2% of GDP. 7. Rest of govt (NASA, EPA, etc. etc. is 4% of GDP.

    I’m doing these figures from memory so I may be off by 1% here or there.

    Point is it is hard to find even 1% of GDP to cut.

    REPLY:[ I’m quite happy to “critique US government expenditures” based on the Percent of MY MONEY they take. Nothing more really is needed…

    With that said: Using GDP is not a very good metric. Not only is GDP itself rather broken (that oil spill in the Gulf of Mexico is adding to GDP, but not to national wealth) but taking it ‘by department’ with a threshold of ‘large percentages’ just finds out that there are a heck of a lot of departments. Instead, take it as a percent of Government Spending and it’s much easier to spot the big lumps. “Entitlements” in aggregate is a giant one. Interest on the debt is another big one, and growing terrifyingly fast. Just stop borrowing and pay off the damn debt for starters. Simply state that from this point forward, the US Government can not issue any new debt. Period. All old debt to be retired at maturity. Cut Up The Damn Credit Card. (They don’t know how to use it responsibly… so that’s the cure…)

    Then there are whole departments that could be scrapped. Take the Department of Education and the Department of Energy, just for starters. The individual states are quite capable of running a classroom without the Federal Government. (My spouse could do it all by herself. No, really. She has a k-12 credential that qualifies her to run a 1 room school house all by herself. There are few essential economies of scale in Education. There ARE dramatic DIS-economies of scale in education…) Markets have reliably delivered energy for generations without government. Frankly, the DOE gets in the way more than it helps. The idea that they are somehow going to get us off of oil is crazy. They’ve had decades and things have gotten worse, not better. Just get them out of the way and things will improve.

    I’d toss in the whole welfare apparatus too, if it was up to me. States can choose what they want to do in the way of welfare. Oh, and the Department of Transportation can go too. We don’t need “Federal Highway Funds”, we need the money left in the States, who are quite capable of making what roads are needed. Then I’d stop 100% of ALL “foreign aid”. This is largely a boondoggle that just squanders money. It corrupts foreign relations and is a giant political slush fund. Exactly WHY ought we to be funding BOTH Egypt and Israel to not kill each other via “Foreign Aid”? We don’t need to be spending $Billions for bribing other peoples governments.

    Finally, if we were to simply leave the world alone (and let them kill each other off without our help…) the US Military budget could be much much smaller. For example, I can see little reason for the USA to have a major military base in Germany. Do we really need to put that much money into Germany each year? We packed up and left the Philippines after one volcano, with darned near no planning and with folks shouting about how critical were our TWO bases there (both Navy and Air Force) during lease price negotiations just prior to the volcano…

    With all that (and much more similar…) done, you could reduce Fed costs dramatically, and then dump the income tax. That lets you scrap all those $Billions in “tax code” and compliance costs. There are a half dozen ways to raise the needed revenue without the waste and intrusion into folks lives.

    Oh, and given that both UPS and FED-Ex do a better job with packages than the US Postal Service… I’d strongly consider simply selling the Post Office. I don’t really see why we need federal agents to deliver little folded bits of paper…

    You see how simple it is? Once you start to ask: “Is it really essential to have the FEDS do this or that thing?” you end up with a very short list really really fast. A military big enough to defend US, but not policeman to the world. Coordination with other governments. International trade and tariff rules negotiation and enforcement. Patents. The basics. Kind of like what was listed in the Constitution…

    (BTW, you could dump the whole central banking and Treasury money apparatus in large part if you simply had gold and silver as money, also as the constitution says. But even if you don’t like metals as money, I’d point out that Visa and Master Card do just fine running their ‘plastic money’ part of the money supply. While it’s ‘nice’ to have a central money authority manufacturing money, we trade $TRILLIONS of various paper assets and commodities every month without government creating them all or setting their “value”.)

    So I’d suggest that you don’t want to “go there” in asserting there is not much to cut. “Efficiency Reviews” was my professional specialty for many years, and I’m darned good at finding what does not need to be done and dumping it. I managed a supercomputer site with a total staff of under 40 when the “rest of industry” low was about 200 (and several were in the thousands – mostly government sites…) I also went into a government office on contract that had a 100% utilized computer system and thought they needed to spend a few million more to get more hardware. When I left they were running with 95% idle CPU and getting ALL the same work done (no reduction of deliverables). All done with software and process improvements … Given a free hand, I could get the essential Federal services done (the ones folks actually want) with about 1/5 to 1/10 the present money. And that is NOT an idle boast. That’s the kind of percentages I’ve achieved before.

    One thing I’d do right off is have congressional salaries and office budgets capped and any increase require a vote of the STATES to approve it. The size of the average of all the States Assembly or Senate salaries would be a good starting point for the cap. The congress ought not to set their own pay. So who can rule over them? The States. So just have a limit of a half dozen “staffers” in a congress critters office and a budget limit of about 1/5 of present (for starters) and require any changes be approved by 60% of the states legislatures. Oh, and this business of flying them all over the place? Can it. If a congressman wants to go somewhere, they can fly coach and turn in an expense report just like the rest of us. (Nancy, give back the jet…) I’d also have them meet for at most 1/2 the year. Say April-September. Summers are nice and miserable in DC. If an emergency comes up, they can vote electronically or drive in… The less they “do”, the better.

    So don’t think at all about percent of GDP. Think instead about “Is this NEEDED?” and think in terms of percent you can chop out of each department (up to and including 100%)

    It really isn’t very hard to do…
    -E.M.Smith ]

  5. Dave McK says:

    Oh- about one country being able to inflate the Euro – yes, it’s possible. Free lancers with excellent graphics skills do it all the time. It’s believed by some that North Korea has institutionalized the practice.
    Notice the lovely new dollars? The bankers know all about paper and ink and just how much it really costs.
    Here’s some more trivia of concern:
    From China, you can order gold plated tungsten ingots to your specifications.
    The sum of all the gold ever mined, at current prices, would trade for @ 6 trillion dollars.
    We are approaching peak stupid, too.

  6. E.M.Smith says:

    @Luis:

    FWIW, my understanding of the European Structure is much larger than what’s in a single posting. My major interest is Economics and my strongest subject was International Economics… But every posting can not be a 12 volume magnum opus. (And frankly, most folks glaze over rapidly as soon as Economics is discussed; even “Political Economics” doesn’t allow for much length of text…)

    Yes, the “odd bit” is the lack of a common treasury. The “overall view” is just as you described it. Europe is stuck between 2 horses. Not a single country with all the machinery, yet married to each other with a halfhearted commitment.

    And that is the problem.

    Will the marriage go all the way, or end in divorce? It is as yet unknown.

    Does this set of circumstances break the commitment? Or is ‘yet another patch’ layered on. In the medium term, it will be “yet another patch”. Germany and the IMF will come up with something. But that can not hold forever. If Greece does not cause the breakdown, then what happens when Spain, Portugal, Ireland, Iceland join the queue? How about Italy? (IMHO next on the list).

    Germany can not carry the whole EU.

    So either all those spendthrift Social Democracies suddenly develop German Discipline, or the Germans get tired of being the pocketbook of Europe. It’s a race condition.

    Generally such races are NOT settled on the side of iron discipline…

    As a trader, I’m much more concerned about the very short term. Days to weeks. In that time frame, the Euro and European stocks are a Very Bad Bet. The news flow will continue negative. My guess is about 2 months all told. Whenever a package is put together to “bail out” Greece (read: Let them keep on spending and not taking painful actions.) that trade comes off. But longer term the trend is “not good” for the Euro in that context.

    But the Euro measured against what? Yes, we have the “Rubber Ruler” problem. The US $ is very much a rubber ruler at this point. Over days or weeks it will rise vs the Euro (pending that resolution package), longer term, as you pointed out, we have two stones racing for the bottom of the hill….

    So as a currency bet, I’d bet on the Yen, the Yuan (for risk takers – eventually China will need to let the peg drift), the Aussy FXY, or the Canadian FXC. Maybe even the Brazilian Real and the Mexican Peso! But the long term standard of measure is Gold and Oil. Both volatile, but possessing intrinsic worth. A basket of Swiss Franc, Gold, and Oil would not be a bad measuring tool.

    FWIW, the statement about socialism and social democracies “spending to ruin” is a simple truth. But it contains no time table. That depends on other factors. If you wish to dispute the point about currencies, please show me the social democracy that has had a stable non-gold backed Fiat Currency that has been a stable store of value for 200 years plus. I’d love to see it… Heck, even 100 years would be “way cool” and even 50 years would be interesting to note.

    (Typically fiat money loses value about 50% to 95% per lifetime. Sometimes much faster… It loses value more slowly in countries with spending discipline, and that tends to be contrary to socialism (though there are some odd individual cases; such as the German socialism). So the presence of a “socialism” of any stripe is “one negative” and the absence of discipline is “another negative”. That one of these may be in a positive state does not negate the importance of the other…)

    Finally, on the US and a ratings cut. Everyone will move heaven and earth to try to prevent it… and they will succeed at having no ratings cut, but fail at preserving value. We have several $Trillion in debt to roll over, we’re spending several $Trillion more that we don’t have on a massive growth of social entitlement programs, the US Taxpayer has no interest in higher taxes (anyone who votes for a VAT here is likely to find themselves on the street smelling of tar and covered in a white fluffy suit – at least that’s my read on the “mood” of folks here). Oh, and we’ve got about $100 Trillion of unfunded spending mandates already. Think about it.

    There are only 2 ways this can work:

    1) China loans us ANOTHER $10 Trillion over the next 10 years and does not really care about ever being repaid.

    2) We inflate the debt away by letting the currency rot.

    I think we’re going to pick door number 2 …

    So, will that result in a ‘debt rating cut’? Most likely not, as we will repay every single note in full. And each dollar will buy about 1/10 to 1/100 of the value when the debt was created… So we will keep our debt rating, as we have a single treasury and we can run the printing presses “full speed ahead”.

    But that AAA debt rating does NOT mean that US Treasuries are a good investment…

    And that is the major difference between the Euro Zone and the USA. We can easily bugger the currency (and we have – it’s now worth about 1/10 of what it was in 1965 ) while such moves inside the Euro Zone lead to inter-country stresses. Perhaps enough to break the Euro Zone.

    @Dave Mck:

    Yeah, I’ve got a very old copy of Adam Smith on my shelf… maybe it’s time to read it again…

    Hmmm… Gold 19.3 and Tungsten 19.6. A bit of dilution could get the density right and might even make it machinable enough to not require sintering… Wonder if it “rings” properly when struck.

    Personally, I’m overweight “stuff that hurts if you drop it on your foot” and ‘intrinsic value’ things like oil. My basic theme right now is “buy what China will want to buy”.

    So, out of Europe, OOTUS (Out Of The U S ) and into places like Canada and Brazil, Australian miners, etc.

    I like the shorthand formula for the demographic bomb… I’d also point out there is a delta Wealth as well. Someone is making all the stuff and providing all the labor. As the Boomers retire, we have more people sucking down wealth and fewer making it. That’s gonna hurt… so watch dW/dt and dW/capita as well…

  7. Don Matías says:

    Gentlemen:

    In case you are interested in a thorough study of “Eight Centuries of Financial Folly” I recommend

    “THIS TIME IS DIFFERENT – Eight Centuries of Financial Folly”

    by CARMEN M. REINHART & KENNETH S. ROGOFF

    which I recently perused with great pleasure. The book is about facts and figures not about anecdotes.

    BTW GREECE has been in default or rescheduling 50.6 % of the time since 1800 (ibidem, Table 6.6, page 99). – So they do at least honour their tradition.

    Muchos saludos,

    don Matías.

  8. oldtimer says:

    A question: are your investments in emerging markets mainly via specialist funds or do you have proxy companies that more or less do an equivalent job for you (by having their principal operations in such markets)?

    An observation on Europe, the Germans and the Euro: post WW2 the Germans have had an obsessive belief in the importance of sound money (think Weimar Republic and subsequent rise of Hitler). Many were dragged kicking and screaming into the Euro. The provisionbs for controlled deficits (3%) and debt (60%) as shares of GDP have been breached many times, including by Germany itself. Greece looks as though it could be the last straw for the German voter.

    The solution for Germany would be to exit the Euro and bring back the DM. This would rapidly appreciate vs the Euro and the US$. Among other benefits it probably would help reduce Germany`s huge trade surplus for the same reason that China`s renminbi (or yuan if you prefer) needs to appreciate.

    Such a political earthquake will, no doubt, have to wait a while.

  9. Luís says:

    FWIW, the statement about socialism and social democracies “spending to ruin” is a simple truth. But it contains no time table. That depends on other factors. If you wish to dispute the point about currencies, please show me the social democracy that has had a stable non-gold backed Fiat Currency that has been a stable store of value for 200 years plus.

    Scientific Socialism is 150 years old. Social democracies in northern Europe are about 60 years old. The present world paper currency system is 40 years old. Are you unaware of all this? or trying to mystify the subject?

    You are conflating Socialism – a philosophical current – with paper currencies – a monetary system. That leaves me somewhat unease about your intentions.

    I do not dispute anyone’s philosophies, each individual has his beliefs and I do not intend to preach anything, especially at a Science blog.

  10. oldtimer says:

    OT: My evidence to the Russell enquiry has now been published on line. You may recall I referred to your work on land based temperatures. It can be found here:
    http://www.cce-review.org/evidence/Andrews.pdf

    REPLY: [ Nicely done! -E.M.Smith ]

  11. E.M.Smith says:

    @Luis:

    While I’m not real keen on wiki as a source (since it changes moment to moment based on political pressures) the wiki on Socialism puts the start as:

    “The history of socialism finds its origins in the French Revolution of 1789 and the changes brought about by the Industrial Revolution, although it has precedents in earlier movements and ideas. The term ‘socialism’ is variously attributed to Pierre Leroux in 1834, who called socialism “the doctrine which would not give up any of the principles of Liberty, Equality, Fraternity” of the French Revolution of 1789[1] or to Marie Roch Louis Reybaud in France, or in England to Robert Owen, who is considered the father of the cooperative movement.[2]”

    So right around 200 years ago, give or take a decade and depending on what you want to count as the start. FWIW, there have been “socialist” systems prior to that point, just not labeled with the word. The word “socialism” begins, as they point out, in the early 1800s; but they also point out that precedents existed well in advance. “Scientific Socialism” is an oxymoron, so I’ll leave it to speak for itself. You’ve also conveniently left out the “or 100″ or even 50… So, nice attempt at a dodge, still waiting for that existence proof…

    And yes, I’m discussing the impact of socialism on currencies. Hard to talk about the impact of A on B without having both A and B in the topic…

    You also need to brush up a bit on your history of paper money. It was not invented 40 years ago… From:

    http://www.moneymuseum.com/standard_english/raeume/geld_machen/werkstatt/papiergeld/geschichte_papier/geschichte_papier.html

    The Chinese were the first to inventpaper around 100 AD. They were also the first to invent paper money, which in its early form can be traced back to the 7th century.

    In the year 812, the Chinese Emperor used it as a temporary solution because of the copper shortage. This money was called “flying money”. It was so popular that by 970 it dominated as a monetary unit.

    These first bank notes carried a guarantee that it could be traded at any time for coinage. The name of this bank note was “cash”.

    The oldest existing bank note is the 1000 cash note of the Ming dynasty

    from the era of the Great War 1368-1398. It is 225 x 340 mm with a pile of coins centrally depicted . The picture was to show people who couldn’t read that they could trade the bill in for the depicted number of coins.

    When Marco Polo came back from his travels in China (1275-1292), people in Europe didn’t believe that the Chinese used paper for money. Paper money in Europe came 300 years later. The use of paper money in China stopped in 1455.

    The history of paper money in Europe is interesting. It started as emergency money sustituting for regular money. The first emergency paper bills are from 1483. The first bank notes were printed in the 17th century.

    You’ve made a valiant attempt to narrow the history into a short present, but sorry, no dice. You’ve got several hundred years to choose from. Find some paper money that was NOT backed by gold and other metals that has been stable. And then look at the form of government that has lead to the most rapid rape of the currencies world wide. It’s not a hard reach. And the reason they conflate is simple: Socialism wants to spend money on stuff to give to the people. It spends more than it takes in. When paper money exists, it finds it far too easy to just print more. Other forms of government can do that too, but do it far less. The greed of the power bosses usually outweighs the greed of the average person in those systems, so the need for ‘store of value’ is held higher.

    As per my “intentions”, that’s pretty simple. I intend to make money by trading. That’s what I do to eat and pay the bills. I need to know how things work to know which way to bet. If Socialism made buckets of money and kept currencies stable, I’d bet on them and with them. I really don’t care at all WHAT the system is in some other country. I care WHICH WAY it will move markets where I trade. (In my own country I care because they tax me to pay for stuff to give to other people). China is an interesting example. I regularly place some bets on China and Chinese companies. They are nominally communist. In practice, they follow a capitalist ethic in their markets. Eventually they may end up with the drive to socialist consumption overwhelming their present massive growth of industry under capitalist forces, and at that time I’ll abandon China. So in China, the socialism percentage is dropping and the economy is growing as a result and their currency is getting stronger. Place bets there. In the USA socialism is rising and our economy is suffering, take bets off and expect future currency weakness (though right now the Euro is beating the $ in a race for the bottom, so the “dollar up” trade is winning comparatively). For medium / long term trades, it’s not so much about how much socialism you have, as it is about which way you are headed.

    Also, I’m talking about “Socialism” the form of government, not some “philosophical current”. You can philosophize all you want and I care not one whit. As soon as you are running a country and economy, it’s of importance what you DO as a form of government. If, for example, you run the medical system as a socialist enterprise, you can take it to the bank (literally, and I do…) that the funding for advance R&D and the purchase of new and more exotic (and expensive) drugs and machines will drop. A lot. Don’t bet on PFE bet on TEVA (don’t bet on a high R&D drug company, bet on a generics maker). And one of those bets is on the currency. Just how long before the government decides to just crank up the printing presses to buy more drugs and machines and pay more doctors? It will happen, it’s just a question of rate.

    Oddly, the other end of the spectrum is the other “bad boy” when it comes to currencies. Generally the “Right Wing Dictator” also ruins the currency of a country (often faster than a Left Wing Dictator). Once they find out they don’t need to get the ruling council or junta or citizens or whomever “on board” with a budget; once they learn they can just print and spend, it’s all over for the currency. We are lucky that there are not many surviving Right Wing Dictatorships; but that’s the only reason you don’t hear me railing against THEM for currency abuse. They are among the fastest. Often less than 20 years. Right behind them are “Direct Democracies” at about 50 years. Then “Socialist Democratic Republics”. It’s just that few such dictatorial and direct democracy governments survive the process, so there are not many of them to carp about.

    The most stable tends to be a Republic. (No, not “Republican”, that’s a political party that at present is about the same as the 1965 Democrats… a modestly center left party…) A Republic has a set of “senior statesmen” that are supposed to make more disciplined decisions than the masses directly voting in a Democracy. While it does generally do that, it also has “other issues” that I won’t go into here… One of the things they USUALLY do better is protect the currency against raids for social programs. Unless, like in the USA today, they are all ‘directly elected’. (At one time the Senators were appointed by the States and that prevented the looting of the treasury. No more. Now the raid is on. It just takes about 50 years to reach completion. The bad news is that it began about 50 years ago…)

    Realize that NONE of those things is saying what form of government is BETTER. Personally, I’d love to live in a socialist country as a retired person. No worries and everything paid for. But as a guy working to make money, and especially for my 20-something year old kids, I’d not wish socialism on them. It sucks life from the “young and able” to infuse it into the old and unable. So in an ideal world, I’d have them spend 40 years in a capitalist system, then go retire to a socialist one ;-)

    Finally: This is just “my blog” and not pigeon holed into any particular category. While it does have a strong “science” theme (as I’m that kind of person), it also has a “political economy” theme as I’m an economist by training and make my money by trading financial instruments. It also has a “wow, that’s strange” theme for anything that strikes my fancy. It also has a “neat old tech” theme (see the “English Foot” for example) as that interests me too. Heck, I’ve even thought of putting my cooking tips up here as I grew up in a family of “short order cooks” and have realized that it’s a different way of doing things than most folks use. ( I have no problem making a grilled cheese sandwich for one person and soup with salad for another along with a roast chicken as the main dish for anyone else. It’s just what you do in a restaurant kitchen…). So while I’ll grant that a lot of what is here is a “Science Blog”, that does not restrict what I can or intend to put here, nor what gets discussed. Heck, I opened a thread on religion a while back as some folks wanted to chew on it for a while.

    So let me make it perfectly clear: Anyone, anywhere in the world, is free to pick whatever government system they want. I don’t care and it’s not my place to tell them how to live. I’m quite happy with Communist China and Lange Type Socialist Sweden. Go for it, guys. But I need to know what happens to markets when those systems operate and as they change directions to more / less of socialist and communist processes. And that includes the way they tend to manage their currencies.

    For amusement (and notice that these dates are far earlier than 40 years ago) from:

    http://www.fame.org/NotableQuotes.asp

    George Bernard Shaw “You have to choose [as a voter] between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.”

    Voltaire (1694-1778) “Paper money eventually returns to its intrinsic value —- zero.”

    Daniel Webster,
    speech in the Senate, 1833 “We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.”

    Thomas Jefferson to
    John Taylor, 1816 “I sincerely believe … that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.”

    Daniel Webster “Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money.”

    John Maynard Keynes,
    The Economic Consequences of the Peace,
    1920, page 240 “If, however, a government refrains from regulations and allows matters to take their course, essential commodities soon attain a level of price out of the reach of all but the rich, the worthlessness of the money becomes apparent, and the fraud upon the public can be concealed no longer.”

    John Maynard Keynes,
    The Economic Consequences of the Peace,
    1920, page 235ff “Lenin is said to have declared that the best way to destroy the Capitalistic System was to debauch the currency. . . Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose.”

    George Washington, in letter to
    J. Bowen, Rhode Island,
    Jan. 9, 1787 “Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.”

    George Bancroft,
    A Plea for the Constitution (1886) “Madison, agreeing with the journal of the convention, records that the grant of power to emit bills of credit was refused by a majority of more than four to one. The evidence is perfect; no power to emit paper money was granted to the legislature of the United States.”

    Now, just to show that I’m quite aware that it is insufficient to avoid buggering the currency to simply be a republic, and to show that it can happen outside of socialism we have these quotes from the same source:


    Treasury Secretary Woodin,
    3/7/33 “Where would we be if we had I.O.U.’s scrip and certificates floating all around the country?” Instead he decided to “issue currency against the sound assets of the banks. [As opposed to issuing currency against gold.] The Federal Reserve Act lets us print all we’ll need. And it won’t frighten the people. It won’t look like stage money. It’ll be money that looks like real money.” [Emphasis added.] (Source: ‘Closed for the Holiday: The Bank Holiday of 1933′, p20 – Federal Reserve Bank of Boston)

    Senator Carter Glass,
    Author of the Banking Act of 1933 “Is there any reason why the American people should be taxed to guarantee the debts of banks, any more than they should be taxed to guarantee the debts of other institutions, including merchants, the industries, and the mills of the country?”

    Chief Justice Salmon Chase, formerly Secretary of Treasury in President Lincoln’s administration, in dissent of Knox vs. Lee (The Legal Tender Cases, 1871)
    “The legal tender quality [of money] is only valuable for the purposes of dishonesty.”

    Dr. Alan Greenspan, Chairman of the Federal Reserve Board of Governors, 11/20/2003 “As long as we issue fiat currency, I see no alternative to a legal tender law.”

    My only claim is that Socialism gets there faster, as they have a greater desire to spend on social programs that are “deemed worthy” and modestly fewer roadblocks to doing it.

    In the general case, from the same source, I agree with:


    Friedrich A. Hayek (1899-1992) Austrian Economist, Author and 1974 Nobel Prize-Winner for Economics

    “With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.”

    Dr. Edwin Vieira, FAME Foundation Scholar “You can fool some of the people all of the time, and all of the people some of the time, and that’s good enough.”

    Some are just faster at it than others…

  12. E.M.Smith says:

    oldtimer
    A question: are your investments in emerging markets mainly via specialist funds or do you have proxy companies that more or less do an equivalent job for you (by having their principal operations in such markets)?

    Some of each, though mostly I use “Exchange Traded Funds” or ETFs. So for Brazil, I use EWZ, China FXI, and for Australia EWA. For Brazilian currency it’s BZF. Etc. See the “racing stocks” tab up top. There is a section on ‘foreign stocks’. You will also see charts of my favored vehicles in the WSW type postings. Sometimes I’ll go “inside the fund” and trade a stock directly. So Rio Tinto and BHP Billiton both trade here. Also a host of Chinese and other foreign companies are listed on the NYSE. If one of them pops to the top, I’ll trade it directly. ( Right now BIDU is giving GOOG a run…)

    It all depends on what’s making things move. If it’s a broad movement, I’ll take the broad fund. If, for example, Mining is rising (but not the soda and beer bottlers or the telcos) then I’ll pick out the single sector or stock and trade it. Generally I like to stay in the larger baskets. For one, the indicators work better. Second, they are less volatile on individual news items. And Third: There is the risk of folks “gaming my positions”.

    I’m on the other side of the AGW politics from some very rich folks. If I’m in, oh, PALM, they could squash the stock by shorting it to my ruin. So most of my money goes to positions like QQQQ or EWZ where even a George Sorros would have to work at it to manipulate it for long. I didn’t have that #3 until lately when I started posting what I hold from time to time. And that #3 is why I don’t talk about quantities. It’s hard for someone trying to game my positions to know if I’ve got $1 of CZZ or $100,000 of it. So their risk / reward is not calculable. They might be wasting thousands against my pennies… And while this is a very unlikely case, I have sometimes traded stocks where I moved the price. So if I can move it, it would be easy for anyone else (even the market maker…) to move it against me and ‘game my position’.

    As a consequence, I put more money in things like QQQQ and EWZ where the trade is easier and the ‘risks’ are lower. Not a big deal, just a ‘polish point’.


    An observation on Europe, the Germans and the Euro: post WW2 the Germans have had an obsessive belief in the importance of sound money (think Weimar Republic and subsequent rise of Hitler). … Greece looks as though it could be the last straw for the German voter.

    Hyperinflation will do that to you ;-)

    The solution for Germany would be to exit the Euro and bring back the DM. … Such a political earthquake will, no doubt, have to wait a while.

    Yes, Germany will cleave to the Euro a while longer, I fear. If Germany left the Euro, the Euro would become a creature of the French plus some hangers on. Not sure how long it would last then… Probably a while, as most of the surviving participants would share economic goals.

    I give it about 10 years before Germany finally gives up and leaves the Euro. About 5 years before they stop bailing out the losers (and leaves it to the IMF and others to be the pocketbook of EuroLand). Right now they are still in the “spank them and maybe they will learn” stage. It will take a while to go through “they don’t ever learn” and “I give up, I’m quitting” stages…

    Strange thing, watching so many countries all coping with the same issue. Bad money and lack of spending discipline. Ah well, history… repeat…

  13. Tony Hansen says:

    Thanks, E.M.

  14. Luís says:

    Hello again Michael,

    That was a long response, I recognize your effort. Some important highlights:

    “Scientific Socialism” is an oxymoron […]

    And the reason they conflate is simple: Socialism wants to spend money on stuff to give to the people.

    Also, I’m talking about “Socialism” the form of government […]

    Personally, I’d love to live in a socialist country as a retired person. No worries and everything paid for. But as a guy working to make money, and especially for my 20-something year old kids, I’d not wish socialism on them.

    Naturally you don’t understand what Socialism is.

    I’ve been reading your blog for a while and have great respect for your work, but sentences like the first I chose leave a lot to be desired for: are you trying to mystify me or you don’t know what I was talking about?

    In this longer answer you now confuse Socialism with a monetary system a government structure and an economic system.

    Monetary System

    A monetary system is completely seamless to the implementation of Socialism. The soviets had their try during the gold standard years up to the 1970s. When the gold standard collapsed they shifted to oil, that’s why the USSR imploded when the oil price tanked in 1985. When implemented on a fully planned economy (as the soviets attempted at) money becomes useless because there is no trade.

    On this point I’d like also to note that the post-Bretton-Woods system has no parallel in history regarding its globalisation. It is the first time in history you can move wealth all around the globe dispensing hard currency.

    Government

    Naturally you can’t implement Socialism with a Monarchy, where power and means of production are privately owned and passed on to descendants. Hence Socialism limits the government structure, but is not one by itself and so far has been tried mainly in Republics, where power is detained by elected or selected officials. By the way, what is the R in USSR for?

    Economic system

    That’s your terrain, so you are perfectly aware that while the Slavs tried it with Planned Economics the Scandinavians have chosen the Free Market. These two schools are sometimes pegged on one side to Scientific Socialism and on the other to Utopian Socialism. In my understanding it is perfectly possible to fully control the means of production in a Free Market, it is all a matter of properly identifying what they are. And as the Scandinavians have shown in the past 5 or 6 decades you can build a solidarian state with the proper fiscal framework.

    I’m also getting long here, but before I’m off, I’d just like to close the circle and note once more that Europe is precisely the living example that contradicts your logic. Compare income taxes in Portugal with Denmark. Then try to get sick at one place and the other and observe how both medical systems work.

    Good luck with your euro shorts.

    P.S.: I’m sorry for not quoting Einstein or Engels here, but I’m certain you can go beyond Wikipedia for yourself ;)

  15. E.M.Smith says:

    Luis, please stop making claims about what I do and do not know. It’s a very short trip to the spam filter. Feel free to express what you believe to be the truth, but refrain from putting things in my mouth (or claiming to know what’s inside my head), only I get to do that.

    “Scientific Socialism” is an oxymoron just as “Social Science” is an oxymoron. Things are either a social studies – an ART, or are a science (like physics and chemistry). That’s why it’s a B.A. in social stuff. Tacking the word “science” on the end of arts is just a self aggrandizing affectation that cheapens the real value of Arts. Better to just admit that the Social Studies are an art and depend more on the right side of the brain than the left and take pleasure in that fact. Otherwise we will shortly have BS degrees in painting and fine arts.

    I know full well what Socialism is. I had to study it, in some depth, to get out of University. We were REQUIRED to understand socialism, communism, and a few other ‘isms’ as they ARE economic systems (and that is the degree I got. Not Capitalist Economics – plain old “all types of economies” Economics). Further assertions that “I don’t know what it is” are a bad idea. (Again, feel free to assert what YOU think it is.)

    You then go on to assert that I’ve confused a bunch of things. I suspect you really meant “confounded”, but even most native speakers of English don’t keep the meanings of those two words properly separated. I can confuse a person, but ideas getting mixed together is confounding. At any rate, you want to run off to some land where the form of government is disjoint from the socialism label. Doesn’t work that way.

    There are socialist governments. BY DEFINITION. If you have a central planned or even a government mandated socialism, the government is “doing it”. Sorry, but you can’t neatly separate it out and say “The Government owns the car company and runs it by socialist principles – but it’s not a socialist system of government”. Just doesn’t work. Socialism is an economy run and directed by the government (to greater or lesser degree, depending on the particular flavor of socialism it embodies) and that makes it a form of government.

    Socialism does also embody an economic system. The means of production are managed in whole or in part by the government (again, depending on where you are in the spectrum of ‘isms’) with the products spread around in keeping with social needs more than in keeping with contribution to the production.

    The core definition of what makes an Economic system is “Who makes what, for whom”. Production, distribution, and consumption. BY DEFINITION socialism wants to decide distribution and consumption. Typically it gets it’s hands into most of the “means of production” as well. (Lange type is one of the least intrusive, and even it has major industry such as steel and auto manufacture run by the government. Much as England runs the medical system and as the USA is about to attempt; no doubt with equally dismal results).

    So socialism IS an economic system. (Though I’m sure millions of Economics majors would love for you to get it defined out of the curriculum… I would have preferred to skip it.) Quoting from page 52 of “Economics” by Samuelson ( I trust you recognize that as a foundational work for Economics in the modern age…)

    What is the exception in our system – government ownership of the means of production – is the rule in a socialized state where productive property is collectively owned. The returns from such real capital goods accrue to the government, not to individuals directly. The government then decides how such income is to be distributed among individuals.

    Notice the coupling of “socialized state”. Socialism AS the state, or government. Notice also the frequency of the word ‘government’. It is central to socialism to have a socialist government.

    I note in passing that this is the copy I bought for my first classes in Economics, so page numbers may differ in newer versions. Also note that the two words “Scientific” and “socialism” do not occur together in the index nor in the list of types of socialism.

    From page 871-872 (discussion of common features) Main items will be quoted, but I’ll skip some long details under the main topics if not germane.

    1. Government ownership of productive resources. The role of private property is gradually to be lessened as key industries such as railroads, coal, and even steel are gradually nationalized. Unearned profits from increase in land value are also limited.
    2. Planning. Instead of permitting the free play of profit motives as in a laissez faire market economy, coordinated planning is to be introduced.
    3. Redistribution of income. Inherited wealth and swollen incomes are to be reduced by militant use of government taxing powers. Social security benefits, free medical care, and cradle-to-grave welfare services collectively provided are to increase the well-being of the less-privileged classes and guarantee minimum standards of living.
    4. Peaceful and democratic evolution. Socialism, as distinct from communism, often advocates the peaceful and gradual extension of government ownership – revolution by ballot rather than by bullet. This aim is often more than a tactical move – rather, a deep philosophical tenet of the faith.

    There are then pages on British Socialism, French “indicative-planning”, “The revolution achieved”, “Stalinism”, and then “Diversity on the Left: Yugoslavia” and much much more. FWIW, I got an “A” in the class. If I looked, I could probably even find my old copy of The Communist Manifesto somewhere… Like I said, we had to learn about ALL economic systems.

    Now, if you would like to argue that Socialism is NOT an economic system and does not involve the government owning and running things (thus is inextricably linked to government form and defines some of it’s structures), please feel free. After all, you are only in conflict with Samulson.

    IIRC he got his Nobel Prize in Economics in 1970 …

    (Back when they meant something and before their “currency” was cheapened by a socialist agenda…)

    On the present system of money:

    Folks have always been able to move wealth all around. Nothing new there. We’ve had paper money, on and off, for about 1000 years. (longer in China). From the wiki about the Knights Templar (though not, strictly, a currency; it is a form of ‘paper money’):

    By 1150, the Order’s original mission of guarding pilgrims had changed into a mission of guarding their valuables through an innovative way of issuing letters of credit, an early precursor of modern banking. Pilgrims would visit a Templar house in their home country, depositing their deeds and valuables. The Templars would then give them a letter which would describe their holdings. Modern scholars have stated that the letters were encrypted with a cipher alphabet based on a Maltese Cross; however there is some disagreement on this, and it is possible that the code system was introduced later, and not something used by the medieval Templars themselves. While traveling, the pilgrims could present the letter to other Templars along the way, to “withdraw” funds from their account. This kept the pilgrims safe since they were not carrying valuables, and further increased the power of the Templars.

    The only thing ‘special’ now is that we can do it electronically. Yes, under the gold standard you were supposed to load up a ship with gold every so often and “settle up accounts” country to country. In reality, that was often ignored for many many years on end. In many ways it was easier to move lots of money then. There were things like $10,000 bills in circulation (and they were worth about $200,000 in todays money). No need to stuff your suitcase with $100 bills as is the limit today. Being on the gold STANDARD did not mean all cash was gold…

    And the Soviet problems were only tangentially linked to oil prices. They had LOADS of other issues to deal with. Trying to make it sound like they made oil into money and their collapse was a faux pas of the monetary system is just silly.

    They could have had any monetary system and the outcome would have been the same. They got spent into the ground in an arms race they could not win. The people didn’t have much motivation to work. The socialism end game bit. Hard. They had sold gold, minerals and oil for foreign exchange substantially forever. It was not a sudden thing to start pumping oil and mining / selling resources. Also, this assertion that they were somehow on an “oil standard” is also silly. There was no such basis for currency. It was a source of income, but not a “oil standard”.

    Finally on that paragraph: This notion that money is useless as there is no trade in a planned economy is also silly. Folks get their food, their housing, their clothes, etc. and they work. There is ALWAYS a system of trade to distribute those goods based on the work. And there is ALWAYS a medium of exchange. A Currency.

    Now it may be “ration books” or “food stamps” or Rubles or gold or sea shells or even polished beads or metal disks of zinc and steel. But there is ALWAYS a need for a currency. Even in a centrally planned communist utopia. (Oddly, that prisons tend to settle on cigarettes is an interesting example. They could use any of hundreds of things, but they settle on something of “intrinsic value” and where the supply is constantly kept in check by consumption. In some ways, rather brilliant. “Inflation” is not a problem… And also note that a prison rather precisely fits the definition of a socialist enterprise. The government owns everything, all needs are provided by the government, all labor is organized by the government, and the value of the labor accrues to the government for distribution to the “citizens”… Welcome to Utopia. Get your cigarette currency as you check in.

    Per form of Government:

    You can easily have Socialist Monarchies. Ask the Queen of England or the King of Sweden.

    But there is a large difference between a Socialist Monarchy and an Absolute Monarchy. Just as there is between a Socialist Republic and something like the Argentine Republic or the Chilean Republic when various right wing Juntas were in charge. That socialism is a qualifier on the major types does not remove it from the role of defining a type of government. It’s the CCCP:

    Союз Советских Социалистических Республик

    With BOTH Socialist AND Republic in it. If it had been the Soviet Fascist Republic or the Soviet Capitalist Republic there would have been a far different form of government.

    And then we have this gem:

    In my understanding it is perfectly possible to fully control the means of production in a Free Market,

    Let me point out that BY DEFINITION: No, you can not. in a lassie faire market (the definition of a free market) the means of production are privately owned and privately managed. As soon as you start layering on levels of central control and “planning” you move away from the free market and toward communism (which defines the other polar end). In between you pass through socialism which is again BY DEFINITION not a lassie fair market. FWIW, the steps after lassie faire and before the typical “Democratic Socialism” are, in order, the regulated economy, the mixed economy, and the Lange Type Socialism economy. (Thought I’d save you the time with wiki).

    The USA moved to a “mixed economy” some long time ago. About 1930 was a major push. We’ve recently moved to an early stage of Lange Type Socialism (with the ownership of GM and the nationalization of healthcare that is presently underway). One can only hope we will be smart enough to at least retreat to the Mixed Economy as soon as possible.

    I have a suggestion: Before you continue digging this hole, go get a copy of Samuelson Economics and read it. Notice how economic systems and government are intimately and inextricably bound up together. Notice how the various “isms” are defined. It’s all ‘first year Econ’ so not that hard to pick up. You may need to set aside the Rose Colored Socialism Spectacles to absorb it, though.

    And finally: Please note, again, that I have no agenda to make the world safe for Capitalism. I don’t care at all if folks want to run off and make a socialist commune (of any size, up to and including full continental scale) if that is their wish (and they leave me out of it…) But I do feel compelled to point out that they fail. Inevitably. Yes, it takes a very long time sometimes. Typically about one generation, some times two, occasionally longer, some times shorter. That at any one time one of them is doing “OK” is not a comfort. That simply points out that the participants have not learned from history – yet. But they will learn, in time…

  16. Dave McK says:

    heh.
    Things they haven’t learned that those who consider themselves a ruling class have:
    No means yes. If you chat her it’s not rape.
    Promises never need to be kept.
    Stolen money never need be repaid.
    Debts die with the claimant.

    Something they could learn:
    If you feed em, you breed em.
    Whoever has your money wins.
    The game is rigged so 999,999,999 people must lose.
    You own what you can hide.

  17. E.M.Smith says:

    @Dave McK:

    I would like to point out that you are completely wrong and that your assertions are offensive.

    I’d like to do that, but I can’t…

    Sometimes the truth is a real bitch.

    Anybody got any lipstick? There’s a pig around here somewhere and I need to get it ready for presentation to the public ;-)

  18. pyromancer76 says:

    E.M., I think you should run for office in California (at the same time you finish your book). Of course, you (probably) could not entertain and inform us as thoroughly as you do today, but I think this blog is too easy for you. Your disquisition in answer to Luis provides much of what I know from my economic history, but the clear way you can put it together — with a quickly wit and eloquent sources– is quite unusual.

    However you can use these gifts in today’s trying times will be much appreciated by those who know that a free market with a minimum safety net is the way toward an affluent future for humankind. You give people choice to live with the Socialism Shiny Thing, but I don’t want it around my family or my country. Americans, at the very least, need those who can articulate why not. Think about it.

    In an earlier post you mentioned that Warren Buffet was one of those individuals not seduced by corruption. Would you take a look at Karl Denninger’s critique of his response on the Goldman Sachs investigation May 1? http://market-ticker.denninger.net/
    One quote: OF COURSE he supports “The Bezzle”; when financial firms are expected to be 19% OF S&P PROFITS by the end of this year (up from 12% estimated for the first quarter) anything that impacts those earnings could lead to Berkshire having a wee problem with the mark-to-market on those PUTs.”

    Aside: I had a chance to invest in Berkshire-Hathaway, but declined because I listened to Buffet’s reasons why it was a bad investment at the time. Bad choice on my part. I have had very serious misgivings about him from the time he supported Obama. Had he never researched the solely radical (marxist-islamist thuggery) upbringing, education, (non-)work experience this unqualified individual had????

    Finally, my great respect to Oldtimer for “Evidence to the Independent Climate Change Email Review”.

  19. Chuckles says:

    ‘Anybody got any lipstick? There’s a pig around here somewhere and I need to get it ready for presentation to the public ;-)’

    None of this denigrating pigs, they are fine discerning creatures, as the old song clearly shows.

    One evening in October, when I was one-third sober,
    An’ taking home a ‘load’ with manly pride;
    My poor feet began to stutter, so I lay down in the gutter,
    And a pig came up an’ lay down by my side;
    Then we sang ‘It’s all fair weather when good fellows get together,’
    Till a lady passing by was heard to say:
    ‘You can tell a man who “boozes” by the company he chooses’
    And the pig got up and slowly walked away.

    Politicians, lawyers, climate scientists, wall st bankers, etc please note.

  20. anna v says:

    https://chiefio.wordpress.com/2010/04/27/greece-gets-greased-and-portugal-is-galling/#comment-4498

    Since Greece became a country in 1830, it had been continuously at war with the Ottoman empire until 1922, when disaster struck and about 1.5 million greeks from anatolia came to mainland greece ( which had then a population of less than 5 million) and about the same number died in the wars and carnage in anatolia.

    From 1940 to 1944 greece was at war and then occupation, another 1.5 million died from war and famine, because all the produce was taken for the war of world dominion of the Reich. After the occupation ended there was a civil war until 1949 because the communists, strong in the resistance movement, tried to take over and had to be fought off kilometer by kilometer.

    Greece continually has a “causus beli” threat from modern Turkey which obliges her to keep a large and modern army, buying from the US Germany and France, from boats and submarines to bombs and radar and planes.

    We also got an army junta from 1967 to 1974, nurtured by the US for its own, mainly communist fear, reasons.

    In 1974 the junta miscalculated, or was lead up the garden path, to try and unite Cyprus with Greece, a long standing request. That failed miserably and the junta fell.

    The 50% of the time default from the inception of Greece as a country could be excused because of all the wars up to 1950.

    Unfortunately, in 1981 an ersatz socialist, Antreas Papandreou, came to power, promising everything to everybody. That is when the national debt took off.
    He hired an enormous number into the civil service, he gave pensions from the fund of the sailors to greek refugees from Egypt (Nasser) managing to ruin it, so that it became a civil burden. In 1989 he gave pensions to greek people from the fallen soviet republics.

    50% of the tax revenues go for covering pensions and civil service salaries.
    Another 20% for the standing army and the supplies it needs.
    From the rest it must service the interest of the debt which has reached 314 billion euro and any necessary infrastructure and growth. No wonder we are broke.

    The worse thing of this huge number, over 1million in a country of 10 million, civil servants is that they create work for themselves , since they have now reached the age of being of director status. Bureaucracy has exploded.

    A lot of them do not even pretend to work. There are for example 60 gardeners for a 2 acre lot in the middle of Athens. There might be 20 drivers for 2 ambulances. All these are political appointments, i.e. some politician pressured to have the constituent placed somewhere in the civil service.

    The work ethic has been eroded. In the civil service job creating business of the 1980’s tens of college level new institutes were created generating a surplus of diploma holding people who were looking for a civil service job. Nobody wants to do the “dirty” jobs and we have something like 1million economic immigrants, most illegal, who do the unwanted jobs, from builders to field workers.

    The private sector has responded by evading taxes in various ingenious ways, from bribing tax collectors to double books, to offshores, to “you name it”. In addition a lot of factory jobs, mainly in manufacturing, have been outsourced to cheaper labor countries, like our neighbor Bulgaria.

    The deal that seems to be agreed with the IMF and the EU for something like over 100 billion euros over three years has strict requirements of diminishing civil service salaries and pensions and stopping the influx of civil servants.

    The unions are up in arms, the communist party expects a revolution, and the citizen on the road is bemused and troubled.

    I think it was a mistake for Greece to become part of the euro. In the 1980s after the excesses of the socialists they started printing money like mad and the hoi polloi never knew what hit them. In 1980 my salary was 40.000 drachmae. In 2001, when I retired, it was 650.000, but my 40.000 in 1980 gave me a better standard of living than the 650.000 in 2001. Social unrest was avoided though, which might not be the case now.

  21. anna v says:

    Chiefio,

    Even though I am all for private enterprise and the freedom of the markets expressed in capitalism, the unbridled capitalism as it expressed itself in 18th and 19th century Europe, and the globalized unbridled once more capitalism we see in our days, will, with mathematical certainty, lead to a feudal system. With a class of serfs and a class of overlords.

    That is the way global corporations are playing the game.

    After all what was feudalism? The people with the arms holding the land and the production and mercantile means, and living high. The serfs working hard to keep bread on the table.

    That is the way the global economy is heading unless it is bridled.

    Have you read Cordwainer Smith’s SF stories written about 40 years ago.? Alpha Ralpha Bulevard and the imperium?

    In any case, unless WWIII blows up the whole planet back to square number 1, with the explosion of the technology, and robots have not come into their own yet, there will not be enough work to keep the billions of workers working.

    If in addition “free energy” becomes available, as with fusion, or with some breakthrough in science, the whole system of “money” and “value” will collapse.

    A prudent world society should be heading towards a “leisure ” paradigm, where the few work by choice to keep the system running and the many just do what people on pensions do now, potter around.

  22. Chuckles says:

    Anna v,

    You make some very pertinent points. Unfortunately, the ‘clever’ people in the ruling class and with the money haven’t considered most of them.

    Unlimited cheap or free clean power would probably be a disaster for them for starters.
    If everything is automated and no-one earns a salary, how will anyone buy anything that their corporations produce.
    They can’t move toward a ‘leisure’ paradigm, because that would make their ‘fortunes’ worthless.
    It’s all fiat money, and therefore worthless anyway.
    I suppose we will all have to take in each others washing to earn a living?

    Perhaps we’d better start checking that the powder is dry, or practising our ‘forelock tugging’.

  23. E.M.Smith says:

    @Anna V:

    Thank you so much for your comments from “Someone on the ground”! A ‘local insight’ is worth 1000 times more than the TV view…

    So much to say… OK, first up: The ‘deal’ for the bailout is interesting mostly because of who is providing the money. The folks next on the chopping block… Now THAT will have interesting effects. Guess they figured ‘bail out Greece and Pray; or we go down with her!”.

    Austerity plan: Never works until AFTER the revolution when the lenders lend no more. Don’t expect it to work this time either. You might want to put some of your money where you can get to it during civil unrest… One can hope for a better outcome, and it will take a while for the austerity to fail on that civil unrest, but it needs watching…

    Greek History: So much, for so long, then so much in so short a recent time. Stunning in many ways. You could make a career out of Greek Studies and still never cover it all… unfortunately, much of what you described recently is a perfect example of how “socialism” fails. “Free stuff” for everyone can only be done for a little while, then the economy collapses as either the citizens paying or the foreigners lending the money stop lending or run out of wealth to lose. “Sooner or later you run out of other people’s money to spend” is very very true.

    Sidebar on Greek: I’m feeling guilty as I’ve never “finished” learning any of the highly inflected languages I’ve tried to learn. Russian, Latin, even got a book on Greek. My quest was for an effective language for “clarity of thought”. (My biggest conclusion what that “whatever you grew up with” typically worked best ;-) But I’m still feeling like I ought to get at least one “highly inflected language” done. So… Is there a good reason to choose Greek over Russian, Latin, Czech, … Initially I thought the 4000 years of writings would be reason enough, but from the things I’ve read about Greek, it looks like there are several significant variations over the years. If you learn modern Greek is it possible to read, oh, Plato? Basically, is it rather like Shakespeare where it’s mostly understandable with a small dictionary of antique words; or is it more like Chaucer where it’s nearly Old German more than English ? ( I can already handle the Greek alphabet and read the cognate words, with some work). So, basically, is there a reasonable “pitch” for learning modern Greek?

    Per Capitalism: I’d said a couple of times that I could go on at some length about the ills of capitalism… I’m no fan of Laissez Faire Capitalism ( we’ve seen that unbridled greed leads to things like the complete destruction of the poor classes, the predatory actions such as Standard Oil in the early years and JP Morgan in banking. Thus the monopoly laws… and the rise of perpetual family dynasties based only on positional authority – not merit nor skill.)

    So were I picking an ideal system, right now I’d go for “Mixed Capitalism” which is in reality a mix of about 2/3 Laissez Faire with 1/3 Regulation and a small admixture of “Socialism Lite” for things like unemployment insurance and taking care of the indigent.

    Unfortunately, I’m not real keen on any of the systems of “Political Economy” that we have. As a consequence, when I toss rocks at one, folks assume I’m for another. I’m not, really. I’m for “leave me alone as much as possible and keep the big power bosses from dominating”. And that just is not available. Socialism won’t leave me alone and Capitalism does not restrain the power bosses.

    So mostly I just accept that, as a peon, I’m going to get peed on. The only questions are what color and from how high up.

    Wish it wasn’t so, but…

    The Imperium sounds familiar.

    About having too many workers for the work:

    That is NEVER going to happen.

    Folks can always create more natural wealth. Be it writing books, providing personal services, acting in plays, you name it. There is a constant confounding of “jobs” vs “creating wealth”. As your Greek examples showed, you can easily have “full employment” but if they are not creating net wealth, the end result is decay and collapse. The proper goal is to create net wealth. And wealth comes in many forms. So we could make Bansai Trees or spend hours making hand blown glass statuary or even giving each other massages, and those all have some inherent value. Some “worth”. Even if 100 % of manufactures were done robotically and at zero cost, we would find things to do that created ‘net wealth’ for each other. Heck, we could all study various arts and sciences if nothing else… Work that creates wealth does not have to be mining gold nor assembling vacuum cleaners…

    @Pyromancer76 per Buffet:

    He is an exquisite negotiator. He has politics with which I strongly do not agree. He will make deals that others can not make, and do it at great gain for his shareholders ( i.e. me.) but at the end of the day, he is an honorable man who is just. Look, *I* know that the housing bubble was caused by various government idiots repealing some laws and making others that mandated bad loans. And *I* made money off of trades in LEH et.al. But trades dont make me a bad person…

  24. anna v says:

    E.M.Smith

    Well, arts and crafts are the leisure class I am talking about, but the hoi polloi will probably just play football etc.
    One could learn a lot from the upper classes after medieval times, when the church stopped strangling creativity.

    Now for Greek, though of course I am partial to modern, for clarity and economy of language nothing can beat ancient Greek. That is why the sciences still use greek words when new stuff comes up. Ancient greek is a very logical language, it is as if first logic was decided upon and then the language formed.

    It dominated for centuries thought, and even now people become enamored with it, though a dead language. This is probably the result of written language transmitted over generations in a fortuitously appropriate language.

    German syntax resembles ancient greek syntax .

    Modern Greek, due to the many dialects intermingling with latin and italian and turkish and you name it, is intereresting in its richness, but not particularly to be chosen over French, for example. It has lost the logical clarity of classical ancient greek.

    As for economic advice, since I am living off my civil service pension, I will batten down the hatches, but there is not much wealth that one can squirrel away on that. I am already getting a cut of 15% of yearly income.

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