What
More and more I have noticed a trend amongst the business and political press: the touting of entrepreneurs as potential saviors of the economy. While it may be flattering, entrepreneurs need to be aware of the potential pitfalls that can result from the actions of people like Michael Bloomberg, billionaire mayor of New York City and an entrepreneur in his own right. The danger lies in the pudding: creativity, drive and–especially–results cannot be legislated or mandated.
Who/Where
The City of New York recently entered into a joint venture with FirstMark Capital intended to make New York “the next Silicon Valley” or more aptly “Sand Hill Road“. The new NYC Entrepreneurial Fund will focus on New-York-City-specific businesses in the information technology space, such as one that produces an electronic city guide. Citizens of Cleveland, Ohio been more successful in hitting the target by enabling other citizens to do what comes easiest to them. Entities such as the Civic Innovation Laboratory, headed by Jennifer Thomas, teach budding first time entrepreneurs how to do entrepreneurship as a discipline in and of itself. CIL also provides access to funder networks that can help make an idea reality. By allowing entrepreneurs fuller breadth in their activities, the citizens of Cleveland are providing themselves and their society with the opportunity to have fuller real economic recovery.
How
The problem with New York City’s initiative is that the focus is too narrow. Most people don’t quite understand what information technology businesses are supposed to do (which is to ease the torrent of information now available due to innovations like the internet into a more manageable stream of things that are relevant to customer’s lives and/or businesses) and if they do, they may not have any ideas for revolutionizing the area. However, like the video linked to above demonstrates, there may be people with an interest in stunt-biking or ceramics making. Contrary to popular belief, entrepreneurship isn’t always about making billions of dollars, creating millions of jobs or putting founders on the cover of Fortune Magazine. More often, entrepreneurship is about those moments that occur when someone says, “It would be nice if someone solved this problem for me.” When people can ideate a business with the hope that millions of others might want the solution that they are creating real value is built. Sometimes it results in billions of dollars of revenue and an IPO, but more often cash flow is in the low millions and the entrepreneur provides jobs for under 500 people (small business accounts for over half of U.S. employment). The formula for success is not always the “cutting edge” or what the bureaucrats in any local or federal governments determine to be in their interest.
Where
While hopefully I am wrong, I do not hold high expectations for the New York City entrepreneurial fund. Rather, I imagine some single mother or adolescent wierdo who feels left out of the “cutting edge” and decides to follow a dream with the hopes that someone else feels their pain and is willing to pay for their product to ease it (their own pain, of course). Great companies are built by serving an unmet customer need, not by being in the information technology sector, having prominent spokespersons or even assembling a highly qualified team. I am telling you that if you have a way to solve a need that corporations have overlooked, then you have a potential business. And you don’t need Mayor Bloomberg backing you to succeed. (Take a look at the guy who invented the Super Soaker–you don’t have to save the world, just make life easier or more enjoyable)
Obviously, the “when” is “now”…
Also worth reading is 50 Ugly Truths about Entrepreneurship and 5 Reasons to do it Anyway.
The Apéritif
In my non-digital life I am a “turnaround consultant”, which means that I help bring companies out of crisis, like bankruptcy, and return them to profitability. My first step is always to have a chat with the top-level management to hear their philosophies on business, life, family, etc. I try to indentify character traits that will tell me how the management led the business into its current crisis. Almost always, the management is to blame for the situation in which the company finds itself. The workers usually are very honest with themselves and interested in doing good work, but are pushed by management to cut costs and otherwise sacrifice craftsmanship. In the recent recession, primary responsibility rests with the government (of the U.S.) and ratings agencies for accepting what the Wall Street lobbyists told them and auxillary blame rests with the consumer. Yes, that means you. We as a people have become addicted to living beyond our means. In trying to ‘keep up with the Joneses’ we took out highly leveraged mortgages and even participated in building a speculatory bubble. Fortunately, Wall Street has been clever enough to extract itself from the entire credit crisis (which is much bigger than the mortgage market) and is poised to lead us out of the recession, albeit at a slower rate than the growth of the bonuses that i-bankers will recieve. For all intents and purposes, the recession is over. The proof is in the pudding.
Main Course
The United States Federal Reserve Bank–the central banking cartel controlled by Wall Street–has begun efforts to siphon liquidity from the financial system, and not a moment too late. Inflation has been kept in check by the banks’ reluctance to lend out the money they recieved as part of the the TARP and stimulus programs. Now the Fed is urging the banks to park all of the money it gave out inside of its gilded doors, effectively taking it out of circulation. This is the exact opposite of what Europe has done by following its own mandate, which is to be reluctant to inject liquidity into the system for the sake of price stability (read: “controlling inflation”), which is different from the Federal Reserve’s mandate to keep an eye on inflation and unemployment.
Before Europe had thought about system-wide stimulus, the United States had already injected $2.5 trillion into the financial system in order to prop up the creditors of the financial institutions (any “rescue” is about the creditors, hence the phrase “too interconnected to fail”). Now that it has fended off the possible 20+% jobless rate that was quite possible–since we were looking at a barter economy without the stimulus–its job is now to insure that inflation will not erode the already reduced purchasing power of the American consumer on unemployment. On the other hand, Europe, particularly Germany, has been reluctant to give out money to its members because it is convinced that things will go on as usual (corruption and mis-management) and that the current situation will eventually repeat itself, since the managers of the member countries have retained their seats in the halls of their respective governments. Germany is right in its assumption and understandably is concerned about being left holding the bag that is a result of the fiscal mis-management of the Meditteranean-adjacent EU members. The bad part about this is that as the exporting country with all of the cash in Europe, Germany must provide credit to other European nations in order to enable them to continue buying its goods, assuring that Germans have jobs. Germany is too “interconnected” not to give, which gives us a chicken/egg predicament of sorts.
Dessert
Considering that U.S. institutions, public and private, have successfully hoodwinked the markets (read: the World) into thinking that they have solved their fiscal worries (they are really just buried in the tombs of the treasury and BlackRock) the markets have had to look elsewhere for opportunities to exploit fiscal weakness through short selling, hence Germany’s legislative response, which is naively intended to shore up the fiscal conditions of EU member states. In a word, Germany is doing everything it can to avoid paying for a European recovery. Instead of improving market response it has precipitated the opposite of what it hoped for. Europe is now struggling to appease the financial markets, which have the ability to determine the effectiveness of reforms through what is informally known as the “Wall Street referendum”, in which investors vote with their dollars, supporting or snatching the rug from under efforts to restore confidence with legislation. Europe, ex-the United Kingdom, mistakenly believes that is can legislate a recovery when the ability to do so is allowed or denied by international financial institutions which bankroll all public and private efforts. This means that while the U.S. recovers, the crisis in the European Union most likely will be protracted and drag on into 2011, by which time the markets will grow tired of pessimistic speculation on the fate of Europe.
The Point
I am an American. My ancestors arrived here about 300 years ago and entered the middle-class in 1893. As an American I was raised with certain beliefs, biases and traditions (for example: I like apple pie). I remember being taught as a child about the Monroe Doctrine and “manifest destiny” the result of which was the development of “the greatest, most fortunate nation on earth”. When my family entered the middle class, the great depression was yet to come, but America still had a long, long way to grow in power, wealth and prestige. Now it seems that all three of these are increasingly comming into question. America is not only in decline, it has been in decline since the 1980′s (in trade deficit terms) and while not facing a train wreck, is due for a car accident unless something seriously changes (the subprime market meltdown is more of a broken leg). There was a time when a house never lost its value and U.S. treasury yields were referred to as “risk free”. One of those factors has already changed…
Basic Economics (Quick and Dirty)
The basis for a country’s wealth lie mostly in capital, human capital and technology. Humans use (invest) capital (natural resources/money) in efficient processes that create more capital (goods, money) called value by people like myself. The measure of the efficiency of this process is called productivity. Productivity is generally increased by increasing labor hours until the human capital begins to reach a point of exhaustion at which point additional value is realized through the application of technology, or ways of doing things that increase the efficiency of value creation. In advanced societies, technology is continually developed resulting in ever increasing productivity (at least we like to think so).
In the current world economy, people, companies and nations produce goods (and increasingly, services) using their human capital, capital and technology in areas of their respective expertise. Since different people are good at different things, people, companies and nations engage in trade. By producing more than they consume, people earn income, companies earn profits and countries earn trade surpluses. The inverse results in debt, quarterly loss (for public companies) and deficits (public debt) respectively. Generally, people, companies and nations that are net producers (and exporters/sellers) experience wealth accumulation as described by Horatio Alger. When these entities consume more than they produce, they tend to become accumulate debt and suffer various mailaises arising from that debt, up to and including dissolution unless the debt is serviced or otherwise eliminated, usually by increasing productivity followed by exportation of the realized value to the creditors.
Patriotism
As stated above, Americans believe that their country is the greatest thing since paper money (they invented sliced-bread). In America, it is a commonly held belief that the country is divinely ordained to continue having its power, wealth and prestige indefinitely. Recently, the American media has focused on the so-called evils of various entities that have been caught betting against America, expressing a resounding sentiment that anyone (be it person, company or country) that benefits from America’s demise is evil. This demise, of course, refers to the temporary economic reversal known as the subprime mortgage crisis or 2008 financial meltdown. Like 9/11, this crisis requires that individuals choose sides (“You are either with us or against us…”) and stake their claim. Even the rich, those perveyors of all things evil and coveted, are trumpeting the virtues of the “American Way” and re-affirming their faith in the country.
Faith
The reason that America has done as well as it has in spite of its faults is simple to sum up: Protestant values and work ethic. For all of its mistakes the country has had a basic insistence on the rights of the individual, the righteousness of wealth accumulation and the value of hard work. When hard work didn’t seem to produce enough righteousness, the country innovated, producing the technological marvels that brought it out-sized wealth and fame the world over. America’s consistency in technological innovation and application underpins the jingoist belief that America is divinely ordained to greatness. The problem with this innovation is that eventually it strayed away from innovation into betting, gaming and horse-trading. Creating value became secondary.
Again, The Point
After 1945, when the second Great War ended, the United States government adopted a series of economic and political policies which were an extension of the policies of the previous administration. The “New Deal” and the “Fair Deal” produced an economy that finally empitomized the Prostestant Ethic on which the nation had so long fancied itself to have functioned. Despite hiccups the American economy began a stint of unprecedented expansion, based on the premise of a new American Dream of home ownership. Somewhere along the way, people became more concerned with appearances than security and the United States became a consumer economy. The first deficit was posted in the late 1960′s and the U.S. abandoned the gold-standard in favor of an expansionist monetary policy.
While initially based on the premise of reducing inflation and decreasing government intervention in the markets for the sake of innovation, Monetarism resulted in the rise of the hereto unappreciated financial industry and a drastic increase in institutionalized speculation (code-worded “asset management”, “institutional brokerage” and “proprietary trading”), which has little to do with creating value. Combined with a new-fangled consumerist-ethic, speculation resulted in an ostensible golden-age of capitalism in which the United States experienced unprecidented prosperity (read: a vast supply of money and trinkets to spend it on) based on homeownership and growing debt (which is the real “money multiplier), since FDIC member banks were also allowed to “create money” in the form of loans to consumers. The consumer economy was in full effect.
Finally, around the turn of the century (1998 or so) the speculators began executing a new innovation. Securitization, a process that spread debt-risk amongst multiple counter-parties therby reducing risk (or so it seemed) was applied not to corporate bonds as in the 80′s, but to mortgage deeds, the very things underlying the American way of life. Since there was now no risk in lending, people with no money were allowed to get mortgages as well. The system blew up and when the necessary bailouts ($1.5 trillion) were combined with the costs of two wars over the same period, almost $2.5 trillion dollars had gone up in smoke. Of course, the cost of the disaster was driven up by institutional speculators, but it didn’t change the fact that they needed to be bailed out. In large part, the money for the bailout came from borrowing.
With an ever growing spiral of debt, the United States faces two options: either 1.) innovate its way out of this situation (which leads to an ability to more effectively service the debt) or 2.) continue consuming until all of the assets of the country are foreign-owned (a process that would be sped up in the event of default). Since there really is no escaping the debt relationship by either the debtor (the U.S.) or the creditors (China, U.A.E., Saudi Arabia) without harm to both the possibility of a financial apocalypse is remote. More likely, is that the U.S. sees a steady, gradual erosion of its standing in the world as it slowly becomes a vassal-state to its creditors. The fact that the latter scenario could take up to 50 years to occur makes is more likely to happen, given that Americans are so good at forgetting history. In the meantime, the media will focus on the various ‘flavors of the month’ including less likely, more enthralling disaster scenarios. People who can also see this scenario will receive only scant attention as the threat slowly becomes reality, the present situation, by that time, having been forgotten.
In spite of this sobering prognosis and my knowledge of economics I continue to have faith in the “spirit” of America. Perhaps robust innovation and enhanced productivity paired with a moderate reduction in consumption will allow America to avoid the aforementioned decline in the wake of the “rise of the rest”, which will doubtlessly occur. One thing is for certain; American has always managed to amaze and capture the imaginations of people who make economic miracles possible. Those people continue to come to its shores in droves, bringing with them talent and possiblity. Perhaps it is possible that America will continue to live up do its ideals…
In other news…
…Germany bans “naked” short selling of EU sovereign debt. This despite the fact that most of the concerned trades occur in London and New York, outside of Germany’s jurisdiction… It looks like they are going to need another trillion euros…
Mission Impossible: Fixing Greek Debt
It seems like Greece has bribed itself out of an economy. When looking at the situation in the Aegean it is really hard to know where to start. Most blogs focus on the perceived failings of Greek culture. There is a long-standing culture of corruption, which include ordinary citizen businesses, bureaucrats and even extends into the state-run medical sector. Much less examined is the role elite corruption, which includes high government officials and the rich. The factors have produced a thriving grey market, which thrives on a currency called “fakellaki”, the word for the small white envelopes containing bribes that are necessary to get anything done in dealings with the state in Greece. Consequentially, most people in Greece view themselves as being at war with EU directives in general and the Greek law in particular. Tax fraud is widespread and two-tiered. The poor and middle class practice tax evasion, while the rich are able to engage in tax avoidance. The results of this are impressively discouraging: a current account deficit that is 15% of GDP, public debt that is 115% of GDP, a 10.3% unemployment rate (which is even higher than that in the United States) and economic competitiveness lower than Russia. As the picture becomes more complete, one realizes that Greek debt can’t be downgraded enough. The question becomes, “What now?” With the Pareto principle in mind I will take my shot in the dark; at the Greek shipping industry.
The Who and What
The Greek merchant marine fleet is the largest in the world, representing 8% of all ships in the world. Greek owned vessels account for 40% of the total in the EU and do 48.2% of EU shipping. In the world, a full 25% of oil tankers are Greek-owned. The juice is that only 29.25% (707 ships of 2377 in 2007) of these ships sail under the Greek flag. Flags of convenience include those from Malta, Cyprus, Pamana and Liberia. The largest foreign foreign-flagged parts of the Greek-owned fleet are Liberia-flagged oil tankers and Maltese flagged dry bulk carriers. Cargo is switch from foreign-flagged carriers to Greek-flagged ones (which are the largest) at ports like Piraeus before entering Greece to avoid import duties. Fakellaki is also at work here, but on a larger scale due to the size of the industy and its players. The only merchant navy that rivals that of Greece is Japan’s. (See HERE and HERE)
The How: Impunity
While a lot of this can be explained by maritime convention what is harder to defend is the fact that the Greek shipping sector accounts for one-third of the trade deficit. It does one well to keep in mind the attitudes expressed by Greek shipping families that either dominate life in Greece but live in Switzerland, the U.K. and the U.S. Says one magnate, “What we do here is an international business. We do not relate financially at all with what’s going on in Greece.” These members of the Greek rich comprise an international elite, members of what David Rothkopf calls the Superclass, who are more concerned with the smooth functioning of world markets, than they are with the health of any country in particular, including their own. They are enabled in this attitude by legalities that enable them to avoid taxes and import duties. These entrepreneurs exploit the law with aplomb. At one point, Greece was the third largest market for London law firms. This, of course, makes for some very impressive lobbying. As previously mentioned on the ZeroHedge blog: “The Shippers are largely untaxed on their global operations. Their status is ‘protected’ under the constitution. Taxing the shippers would go a long way toward closing the budget gap. The changes in tax laws will not come easy. There is no certainty of the outcome.”
It Pays to be Rich
There is a saying in Greece that, “..the more money you steal the better off you are. If you steal a few euros, a few hundred euros you go to jail … you steal thousands of euros, we’ll talk about it … you steal a few million euros you become a hero.” While legally, the great shipping families of Greece haven’t technically stolen anything, they have had undue influence the fortunes of the Greek state. In late 2008, when the financial crisis brought global trading of actual goods to a halt, Greek ships sat empty in ports across the globe, particularly in Asia. The lack of freight fees engendered worries that Greek shipping companies would be unable to service their debt, held mostly by RBS and HSBC, resulting in a historic break in the link of Greek debt to Italian bonds (now another of the so-called PIIGS) and a spread of 123 basis points between Greek and German bonds in October of that year, when the public debt was at 92% of GDP. The worries persisted through 2009, pushing up the cost of borrowing for the Greek government until public debt reached its current level. In a word, the Greek shipping industry crisis added fuel to an already dire situation. The shipping companies then avoided taxes when the Greek government needed them the most after it had acted as the industy’s scapegoat. Essentially, the Greek firms ‘proped and tunneled’, then left their national government holding the debt-bag. As of April 11, spreads between Greek and German bond yields had increased to 730 basis points, external debt was 163% of GDP (€391 billion) and it was expected that Greece would have to export nearly 10% of GDP to external creditors for the 
foreseeable future. Is it no wonder that €110 billion is not considered sufficient to calm fears. And I didn’t even get to the subject of the country’s bloated civil service of 1.24 million in a country where the workforce is only 4.5 million strong. Cutting the holiday bonuses of these people on scratches the surface. But that’s for another post.
In other news…
… Freddie Mac needs more money and no one seems to be able to figure out why the DJIA lost 1,000 points in one day. As though flash trades don’t exist any more. That also is a subject for another post…
A Frivolous Lawsuit
Despite my best efforts to ignore the trend and wait for what I consider “real” news, the public bashing of Goldman Sachs continues unabated. I am really not interested in going into the details of the case on this blog, but the gist of it is that Goldman Sachs teamed up with a hedge fund (Paulson & Co.) that wanted to gain money by selling nouveau junk bonds to a sucker firm while betting against the bonds without telling the victim what was going on. Paulson & Co. made $1 billion from the scheme, while Goldman netted $2.5mm for its efforts (see HERE). According to the SEC this is more than just disingenuous; they claim it constitutes a criminal act of fraud. Because the case ultimately can’t hold water the SEC has chosen to launch a civil suit in hopes of finding Goldman “liable” à la OJ Simpson, which allows the regulator to ”get” Goldman without a guilty verdict. Next week Goldman boss Lloyd Blankfein faces Asian Triad (U.S. Senate Permanent Subcommitte on Investigation) boss Darth Vader (Carl Levin) in the run-up to his public lynching. Despite this unfortunate situation, the Shadow Kings of Wall Street continue in their support of Goldman’s (Prime Brokerage/Proprietary/High-Speed Trading) business, which could potentially make for some very impressive lobbying. The end result of all of this remains to be seen.
In more legitimate news…
…God turned off that volcano and flights in Europe have resumed at 100 percent capacity. While it will take a while to process the backlog of goods and other halted trading, for all intents and purposes it is back to business as usual in Europe.
The Shadow King
Despite the fact that it is now considered a crime to be proud of creating shareholder value, Wall Street has continued its forward progression. Wall Street emperor Larry Fink keeps getting richer and more powerful, regulators and Main Street none the wiser, while Carl Icahn keeps up the thankless job of trying to drop-kick real criminals. Wall Street 2 won’t be released until fall 2010, so the pop-culture ressurection of Wall Street as the messiah will have to wait (yes, messiah–Gordon Gekko may not be repentant, but he is now a “good guy”, as far as that is possible).
Concerning High-Frequency Trading
As if trying to embarrass Goldman weren’t enough, the Yakuza (Securities and Exchange Commission) have yet another idea to help slow down the economic recovery: killing prime brokerage. Why didn’t I think of that? Truth be told, no real action has been taken, but the SEC has been thinking publicly about the issue. Populist rhetoric or not, this is of concern to anyone who makes moves on the Street. The SEC is trying to give real credence to Fiddy’s maxim ‘Get rich or die tryin’. Apparently “the man” is out to get us all…
In less examined news…
…Morgan Stanley is streamlining its one profitable department and looking for ways to finally take the lead from the market leader. Also, the porn industry leads the way in showing us how to embrace technological innovation. Now we can all watch porn without risking the wrath of the IT department–even at the SEC. At least something in the world is right…
