Economics & Finance

On The Debt Crisis and Europe

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I am not an economist nor a formal, paid pundit on Europe. Here are some of my thoughts on the economy, countries and people that are impacted by the debt crisis.

Some observations:
– The debt problem in Europe isn’t a problem of liquidity (i.e. short term cash flow); it is a problem of solvency (i.e. debt has risen to a point where interest payments are unsustainable, and raising more debt is problematic). Fixing a solvency problem requires structural changes (like defaulting on your house or declaring bankruptcy), while liquidity problems are due to timing. Few seem to be treating the issue like a solvency one, however.
– By European history standards (“hot” wars and “cold” wars) the military climate between nations is benign; with a few exceptions in the Balkans where the borders never were straightened out and occasional puffery from Russia (also mild by historical standards)
– Many of the problems between nations have been “solved” by breaking up countries into component parts (Yugoslavia into ethnic components, Belgium likely ultimately the same) along ethnic group lines, meaning a larger focus on their own ethnic kin and less on overall assimilation of ethnicities into larger, conglomerated countries (there is absolutely no appetite for putting multiple ethnic groups into a larger “whole”)
– The benefits of the Euro are real; lower interest rates, lack of currency risk, and an ability for smaller countries to raise funds similar to the terms of larger nations (due to the implicit backing of the financially weak countries by the financially stronger countries)
– The level of government intervention in virtually all European countries is very high, with the state controlling many institutions directly through armies of rules and bureaucrats while significantly “capturing” other areas of the economy (the banks buying government debt, the power sector, and export-oriented industries like aircraft)
– Growth is slow and there seems to be little chance of it significantly heating up in the near term; the economy is not dynamic and entrepreneurial and some of the formerly most vibrant sectors (real estate, finance, tourism) are in a post-bubble rut
– It seems very unpopular to transfer funds from the stronger to weaker countries given that it is obvious that these weaker countries are not going to “grow” out of their problems nor significantly open or fix their structural economic problems; even the mildest measures in those weaker countries are met with strikes and unrest and even these plans don’t reduce debt, they only reduce the rate of growth on debt
– Youth unemployment is the “flip side” of a large governmental sector and heavy-handed regulation. Youth unemployment is near 40% in some countries like Spain; angry, unemployed youth are often the spark that can set a dangerous situation in motion very quickly

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Dumb Company Tricks

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Describing the dysfunctional management culture of Ford Motor Company during the later years of Henry Ford, Peter Drucker observed that a Ford foundry manager was not allowed to know the cost per ton of the coal being used in his furnaces. This was a function of the secretive and very controlling personality that Mr Ford had developed by this time, aided and abetted by his thuggish sidekick, Harry Bennett.

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Book Review — Levenson — Newton and the Counterfeiter

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Levenson, Thomas, Newton and the Counterfeiter: The Unknown Detective Career of the World’s Greatest Scientist, Houghton Mifflin Harcourt, New York, 2009, 318pp.

The publisher kindly provided a copy of this book for review.

This book was recommended during a Holiday 2009 Book Roundup on chicagoboyz here.

Fans of fiction author Neal Stephenson (The Diamond Age and Anathem were reviewed for chicagoboyz) may recall that one of the most intriguing episodes in his mammoth Baroque Cycle trilogy was Isaac Newton’s use of the Royal Mint to further his interests in the alchemy of gold. In the course of taking on Mint responsibilities, Newton also inherited the responsibility for halting widespread coin tampering and counterfeiting.

Now we have a non-fiction title by a distinguished American science writer focused on the same subject. Newton’s actions as Warden, then Master, of the Mint were less glamourous than his revolutionary contributions to science and industry, but no less critical to the rapid transformation of England into an industrial giant. The real story behind Isaac Newton’s efforts to rescue England’s silver currency from impending disaster, and to revitalize the Royal Mint, is rather unexpected. And Newton’s methodical (and rather fearsome) efforts to hunt down and hang the country’s counterfeiters turn out to be just as fascinating, and just as strange, as Neal Stephenson’s fictional tale of Newton’s derring-do. Stephenson’s blurb on the back-cover of this book confirms as much.

Levenson’s book is built around two dramatic themes.

Firstly, the “fish out of water” transition of Isaac Newton from nerdy reclusive Cambridge savant, obsessed with his privacy, to senior government functionary … comfortable in parliamentary committees, Law Courts, and in the Royal Mint’s interrogation cells.

Secondly, Newton’s multi-year game of “cat and mouse” with a notorious counterfeiter (William Chaloner) that constantly risked Newton’s professional career, and Chaloner’s life. Chaloner actively sought to have Newton pilloried as incompetent, a thief, and anti-government conspirator, and Newton did his best to see Chaloner hung, drawn, and quartered … counterfeiting being a treasonous offense.

The author first builds contrasting biographies of the scholar and the criminal, providing a snapshot of criminal London in the late 17th century. The woeful state of English silver coinage brings Newton to London where he was soon to begin an education entirely unlike anything available in Cambridge University.

SPOILER ALERT: If you’d prefer to learn the story of Newton and the counterfeiter on your own, by reading this book, please skip down to my general comments in the Section titled General Impressions where I’ve tried not to give too much of the tale away.

EYESTRAIN ALERT: This review runs about 10,500 words. Some readers may prefer to print it out.

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A Small Victory

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About a month ago, I wrote about a provision in the “finance reform” bill that had the potential to do great harm to venture capital and angel investing, and hence to America’s economic growth and productivity. I’m happy to note that this provision has now been removed from the Senate bill.

I refer to this as a small victory, despite its importance, because this is only a single win against the flood of virtually insane regulatory and tax policy that threatens to engulf the entire American economy. As the WSJ article notes:

“…the fact that such a destructive provision made it that far shows how little the Members and staff now running Congress understand about wealth creation and the sources of American prosperity.”

Even more disturbing than the lack of understanding of the economy is the lack of understanding of their own limitations. Indeed, this Congress and Administration seem to me like someone who holds an administrative job at an airline–establishing flight schedules and ordering the in-flight meals, let’s say–who decides that his executive title gives him the right to fly a 777 with passengers. Or a political appointee at the Department of Transportation who goes out to the Potomac Approach facility, sits down at a radar screen, and starts directing traffic.

There appears to be no limit to the arrogance of those now dominating our political process.

Optimism

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Just for a change…Matt Ridley has some thoughts that are a bit more optimistic than most of things we read/write these days.

Via Kevin Meyer.