What Family means today?

Tags

debt, family, government, history, society

I think that in one of my past posts I have mentioned that I think that part of the blame for today’s financial crisis is demise of so-called old-fashioned values… I have come up with an explanation to what is going today and why, and I set it in the family values. Here is my train of thought:

In the old days, family provided a security cushion to all its members. Brothers could count on brothers to get protection and hand-me-down old clothes. Sisters were protected by family, which made sure that their purity was intact until they were married. Of course as every family everyone was striving towards better life – parents were hard-working to provide for education and housing for their offspring, in exchange for respect and care when the old age came. There was no other way, in order for the family to reach better social standing and have more, goods and riches gathered (if any) needed to be passed on from generation to generation. In other words, many people had to count on the family support when they were hoping for advancement, the same people had to have offspring to guarantee that those same things will be passed on further and that there will be someone who will take care of the old.

Enter credit age and those traditions have died. Now a son does not need his father at all for anything, quite the opposite, elderly parents have become a burden. No one needs to save up for anything – simple credit application guarantees you all things you wish for, even those you cannot really afford. People have kids because they want to, not because they want to preserve their line or pass anything to them. Everyone on its own for its own enjoyment – this is the motto of today.

We all know where this has led us. Less kids, more debt, and there is no one to pay it back. There is no one to care for older people. Governments are busy printing currencies in order to satisfy consumption demand on one side (through credit) and in order to at least preserve validity of economic laws… This will not last for much longer.

I know how to save Greece!

Tags

debt, drugs, Greece, Greece financial problems, Mexico, money, solution

During my recent trip to Las Vegas I met (as usual at this time of the year) with some friends from the industry. Also as usual for Europeans, one of the topics of our discussion was Greece and its financial debacle.  During that discussion an idea has occurred to me – an idea, which apparently has already been jokingly discussed by some financial gurus with regards to Italy.

The idea is simple: forbid use of cash. Completely.

In case of Italy apparently it was discussed if transactions in cash should be allowed only up to certain limit, say 500 EUR. I think though that in order to kill corruption, or at least hinder it greatly, we should get rid of cash altogether. Install only government approved terminals using high-tech encryption, GPS and ID technology. Use only high security cards with owner’s data on them (whoever is allowed to use those for payment should be stored on the card, even if those are two people). Maybe even add fingerprints and retina scans to it. We add them to passports, why not to payment cards?

That way, when each payment is electronic, everything can be traced and transferred where it would belong, including debt payment. Of course tourists would have to buy cards registered to them – that could be done in banks or kiosks with automatic passport scans. Technology makes such things possible today. No cash – no over the counter payments, no shoddy deals…

There are few bonuses from this: one, Greek electronic industry would profit immensely from this change. Two, no cash means less maintenance (no ATM to fill, less collections etc). Three, Mexico and some other countries with huge drugs problem could solve it or limit it – it is still very difficult to buy drugs with credit (or any other) card. Four, terrorists would have problems as well with all sorts of purchases.

I wonder why no one ever thought about it? Or maybe someone did – then if yes, why no one ever tried it? Maybe powers that be are themselves afraid? Or maybe there are arguments against it? I wonder what those are…

Close All Rating Agencies

Tags

debt, rating, rating agencies

As a follow-up to my post from yesterday, please see here: http://www.bloomberg.com/news/2011-08-08/s-p-seen-surrendering-to-tea-party-at-expense-of-u-s-taxpayer.html

There are two important issues mentioned in that article. First is that the debt situation of the US was known for a number of years and if at all, that rating should be lowered years ago. If an automated rating had been used, this timing issue would be avoided. This leads to the second important issue: timing can be used as a political tool. I am not saying that Tea Party in cooperation with S&P actually did that, but the possibility exists. It will always be there, since people govern such agencies and people decide what rating to issue and people are susceptible to various pressures. Additional factor is that S&P made an error in their calculations – here it does not really matter if they did or not, but again, we all now know that the possibility exists of such an error.

All of those conclusions – political involvement, timing, possibility of an error – do not help us much. We (as in all of us investors, which means pretty much almost everyone on the planet financing anything or buying shares) will suffer consequences. It is not only American issue, rating affects any country and it has global implications of great scale. I am all for warning system for investors, but it must be rid of any human involvement. Figure out a ratio, automate it and let everyone see it, just as you let people see the size of national debt.

To add a bit of oil to a burning fire, there is one more issue I want to address. If a rating will be issued too late (as it now seems to be the case with the US) there is small chance that a country will rebound. Lowered rating causes debt price to get higher, which means, that it is more difficult to pay it back. It is also more difficult to serve old debt (as some cover at least a portion of old debt with newly borrowed money – stupid practice if you ask me, but sometimes there is no choice) and hence cuts in spending need to be introduced. Of course the easiest cuts are in state jobs – pay is lowered, people are laid off, public spending is lowered etc. All this causes loss of jobs, which in turn cause loss of tax income, which in turn causes loss of monies with which the debt could be paid off. Of course another rating is lost – circle closes and a vicious spiral begins. This is now where Greece is in. The only way out is to declare bankruptcy and start everything new.

The timing is then very important. This importance though makes it a very strong political tool and we (all of us all over the world) need to avoid its abuse at all costs. We should close all rating agencies now and replace it with truly independent rating mechanism.

Rate my Sunday Morning

Tags

debt, economy, rating

Woke up on this Sunday morning to (almost usual now) bad news of the world: Tottenham in London on fire, Israeli protest against to high cost of living, Italy told to tighten their budget… Not even one positive broadcast. Of course, this being Sunday, we all know that shadow of lowered US ratings is there. Now we all can dread Monday even more.

I am not all that good in rating systems, but I think that this system is to serve as warning and information to investors that countries (or companies) present higher risk when investing money (borrowing) in them. Following this of course investors would expect higher returns on funds invested. As of that point though my logic ends, as I would think that only as of higher rating you would get higher return. All deals closed before should remain as those were. After all, deal is a deal.

Why then there is talk of refinancing all existing debt of American citizens? According to what I wrote above, only newly borrowed money should cost more.

The other issue which I don’t understand is timing and mechanism of those ratings. If those are based on financial state of a country or a company, then it should be possible to set them as automatic warning systems. One should be able to work out a ratio or other formula which would say that the ratio of debt against projected income is too high for a year ahead. For example: debt/income = 90% means too high (actually almost a catastrophe in my example). That way each country and each investor (banks, funds etc) would know in advance when the rating would drop (or rise). There would be no surprises for anyone and markets would have no reason to panic – there would be enough time to react to deteriorating solvency.

In current system I, as someone who is not really schooled in this, I see only mischief and think that someone makes tons of money on this, where the rest of the world suffers. Each such news brings panic to the markets and share prices of perfectly good companies, doing actually very well, drop like a stone. markets are no longer driven by logic, only by feelings or reactions. Panic is not a good adviser and we should avoid that at all cost, even getting rid of rating agencies and setting clear rating mechanisms.

If you are someone who knows better what ratings are and how they work, please comment and let me know. My Sunday morning, based on the news and weather, is rated AA. Weather is good, I feel rested, but news of the world are bad. Again.