Observing the World

After about an hour's worth of air traffic congestion delays around JFK airport, I finally departed New York City yesterday evening en route for Vilnius, Lithuania... one of my favorite inconspicuous corners of Europe.

The route took me through Helsinki, Finland for a brief connection, and I was on the ground long enough to witness something truly bizarre: a complete and utter lack of people.

I could practically count on two hands the number of passengers milling around the airport this morning during peak business hours... it was almost something out of a zombie movie.

Ordinarily I would have seen hundreds, thousands of people... and I have in the past as I've traversed this route many times before. And no, today was not a holiday.

Helsinki's airport functions as a major transfer point, especially for European business travelers criss-crossing the continent or flying to Asia, which makes airport traffic an interesting proxy on the European economy (though not necessarily a reflection of Finland's).

While a single example is not enough data to draw any significant conclusions, I mentally filed the observation as another snapshot of Europe's deteriorating economic situation.

It reinforces what I observed here several months ago when I was last on the continent in April; it was as if a dark cloud was hanging overhead, and the general mood was absolutely sour. 

People seemed to be capitulating all hope and starting to make peace with the fact that their economic futures have been squandered by a stupid experiment.

Of course, I'm referring specifically to the 'euro experiment'... however the euro is merely a symptom of a much larger experiment-- that of fiat currency.

It wasn't all that long ago that money was actually made of something scarce-- a real asset that couldn't be conjured at will by an appointed bureaucrat.

In time, money supplies grew to be controlled by governments and banking cartels in the form of worthless pieces of paper. Since then, it's devolved further to strings of bits in a giant database; our money supply is nearly all digital.

As my friend Tim Price characterizes it, what passes as 'money' today is merely an abstraction of an abstraction of the real thing.

The euro experiment was merely a commingling of 17 different national fiat experiments... albeit a remarkably stupid one.

Under the normal fiat game, a country would at least have to stand on its own two feet and con(vince) the market that its particular brand of monopoly money was sound.

With the euro, even the trashiest economies in Europe were able to pass off Germany's credibility as their own. And now, finally, after more than a decade, the market is calling that ridiculous bluff.

Spanish bond yields have risen to a euro-era record, well north of 7%. Italian bond yields are 6%. The talking heads on financial news are going bonkers... nobody can fathom these countries staying afloat with interest rates being so 'high'. And they're right.

What's funny is that the 20-year average of Italian 10-year bond yields since 1993 is 5.9%. They're currently priced at 6.06%. Italian bond yields aren't spiking, they're just reverting to the mean. The real spike hasn't happened yet.

Italy is in such dismal shape that having to borrow funds at 'average' rates is going to push it into insolvency... the government can only limp along if it can borrow at absurdly low rates that don't even keep pace with inflation.

Perhaps more than anything, this shows how truly broken the system has become... and what a colossal failure the experiment has been.

Of course, before things completely break down, they'll resort to the same old tactics that bankrupt governments have relied on in the past--outright confiscation of wealth, capital controls, and financial repression.

It's already happening across the continent, in fact.

In Greece, the government is helping itself to people's savings at will, in their sole discretion... and forcing businesses to 'prove' the tax purity of their funds.

In Italy, the government has colluded with several banks (like BNI) to freeze customers out of their accounts with no warning or explanation.

ATM limits are being imposed at many banks across the continent, and Euro leaders are openly discussing more severe controls to stem potential capital flight.

The conclusion to draw from all of this is clear: finance the government, save the banks, screw the people. This reality, coming soon to a western civilization near you.

Simon Black 

The Price of Inequality

Date: June 13, 2012 Reporting From: New York City 

In Medieval Europe when most people were living short, brutish lives wallowing in muddy serfdom, there was one city that served as a shining economic beacon for the rest of the continent: Venice.

At the time, Venice was one of the richest places in the known world, underpinned by its dominance in trade and the upward mobility of its citizens.

The concept of what we know today as "America" was alive and well in Venice during the Middle Ages; Venice was a place where, with guts, hard work, and a little bit of luck, you could become very wealthy and live the Venetian Dream.

The modern Limited Partnership structure, in fact, is derived from an early Venetian model called the 'commenda', a sort of special purpose vehicle for trade missions.

A standard commenda involved young entrepreneurs with a lot of energy but no capital partnering with older veterans with a lot of capital but no energy. The old guys would finance a trade mission to Asia, and the young guy would head off to foreign lands to make money.

If/when he returned, they would split the profits, the young guy receiving 25% to 50%.

A lot of people became very wealthy through this model, and even the poorest serf could come to Venice and rise up in social and financial status.

As you could imagine, though, they managed to find a way to screw it up.

In the early 1300s, the ruling elite eliminated the commenda structure that had made so many people so much money. Shortly afterward, the state started charging exorbitant taxes to merchants and nationalizing trade.

A police force was introduced in 1310 for the first time ever... not to protect the people from criminals, but to protect the criminals (government) from the people.

It didn't take long for Venice to decline into insignificance. Any opportunities to create wealth and live prosperously vanished as Venetian politicians engaged in the wholesale destruction of their economy, the livelihoods of its participants, and the 'Venetian Dream.'

With 20/20 hindsight, we can look back upon medieval Venice and pinpoint the early 1300s as the turning point to rapid decline... when there was a great unraveling of economic foundations and personal freedom.

It certainly makes one wonder whether future historians will look back upon this period in Western civilization and draw the same conclusion.

While I'm no fan of economist Joseph Stiglitz or the neo-Keynesian ideals he espouses, his new book proves this point more than just about any other recent work.

In The Price of Inequality, Stiglitz provides copious data showing that individuals in the United States now have a lower likelihood of moving up in social/financial status than any other developed country in the world.

This fact is reinforced by the Federal Reserve's most recent Survey on Consumer Finances, which showed that median US household net worth fell nearly 40% from 2007 to 2010.

This is the natural effect when you base an entire system on the whims of a very small elite that has awarded itself the ability to spend recklessly, rack up unsustainable levels of debt, and conjure money out of thin air.

As in Venice before them, US politicians have been engaging in the wholesale destruction of their economy, the livelihoods of its participants, and the American Dream.

Mission accomplished.

Until tomorrow, 
  

Simon Black