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Understanding the Euro Problem
The Euro has been allowed to become everyone's problem. And everyone's problem is massive, unsustainable debt.
The international economy is so intertwined at this point that a combination of the USA, China, Germany, and a new European Central Bank will have to "stand behind" all of the excess debt and derivative paper of everyone else. The funnel will go through the IMF. The country most capable of printing sufficient money without (yet) trashing its currency is the USA.
In short, the last of the "guarantors" is the USA, and we will bear the brunt of the "adjustment" in the form of currency swaps and additional fiat money for the IMF, which will then be re-lent into the "system" of banks being crushed by sovereign debts. The American taxpayer, and American natural resources, are the final assets in play. And the Obama administration seems positively eager to build pyramids in the sand. Even a dangerously teetering pyramid can appear impressively stable for a long time and then crumble.
Note that so many of the normal economic terms above are in "quotes": we are now in a world economic system where none of the traditional measures and terms are quite what they used to be. The deterioration is everywhere, the stretching of truth is rampant, and the means kicking problems down the road or onto the other side of the street are more creative than ever.
We may be alone among the prognosticators to suggest that it will be the USA that is the "savior" of the Euro in 2012, but that is the magnitude of the problem: the Buck and the Euro both stop here.
How can this be, when we did not cause Europe's excess systemic consumption and entitlement problems? Of course, we engaged in similar practices and have the same similarly-sized problems of our own, but why should the USA be the backstop for everyone else?
The simple answer is that another manipulative massive bailout WILL happen in 2012, because of short term self-interest and an inability for politicians in the USA to take the short-term pain required to "reset" the balances. Intertwined obligations, guarantees, derivatives, and creative financing make a crash in one region of the world everyone's crash. To allow the Euro to crash now creates an ever more unpleasant ripple effect on every economic underpinning in America as well.
So, despite the problem down the road becoming even bigger, monetary action will be taken by elected politicians and by the unelected Federal Reserve, both desperately keeping their power structures intact. In fact, their relative power over the polity and economy grow enormously all the while, extra-constitutionally. Never waste a crisis ...
Seeing the Debt Problem in Context of Spending
At the end of this newsletter is a chart of the "true debt" of nations, specifically of the western world. With nations, it is always true that no one ever expects those debts to be repaid, but investors are dependent on the creditworthiness of nations to assure that at least the interest gets paid. This is no longer feasible, even at artificially depressed rates we have today.
Yet the following chart is even more telling and horrifying for America in its historical context: with the complete abandonment of Congressional spending discipline since the Republican Congress in the Clinton years (and now not even a pretense of Senate acceptance of House budgets). While tax revenues have slowed somewhat, it is all willful Keynesian government spending that is causing unprecedented debt expansion, not even counting unfunded liabilities..
2012 Politics will Change Exactly Nothing
Doing things monetarily seldom changes the economic problem. In fact, interest-based solutions only enlarge the problems over time. When interest rates are zero or flat, there may be a pretense of stability, but this cannot be maintained forever.
Politically, America will not even properly address its own problems. America itself has a $15 Trillion problem AND a $52 Trillion problem. We have also just crossed the significant 100%-of-GDP line with our national debt alone, beyond which any reasonable interest rate burden means that there will be no funds left over to operate the government without massive deficits. And were the interest rates to rise, the collateral impact will be devastating.
So we must urgently act as a country, but none of the political operatives and candidates quite "get it" strongly enough to really do something about it. No one is a strong enough leader to unify the branches of government and the people, to do the right things and take the right medicine.
Narrowing the Possible Economic Solutions
Current global government profligacy is clearly unsustainable. The pain of austerity is inevitable. That means that as soon as the ability to put off the crisis comes to an end, the tough decisions will be forced upon us all.
Austerity through a future more responsible Congress is a foregone conclusion, but austerity from holding down spending growth is not enough to affect the already-existing debt mountain.
Even confiscation of ALL private income is not enough to fill this spending gap. The only solution is spending reduction and drastic repudiation of future obligations. And yes, higher taxes as well. All highly contractionary.
This will all begin to happen in 2012.
Contraction is a danger especially for those investors participating in conventional trading and superficial economics. Investment solutions will have to be different because traditional economics is now operating on the margins. Sophisticated computer-assisted derivatives profit from ever more microscopic and instantaneous marginal analysis.
Understanding the Critical Impact of Technology
Why are companies today relatively profitable but not growing their use of human labor (jobs)? Are they not incented by potentially higher profits by growing their businesses? The answer involves a number of factors, not least risk aversion and a lack of easy credit, and importantly the increased productivity of technologies, but most importantly an expansion in useful qualified foreign labor pools that have displaced American labor.
Paradoxically, technology advances, including virtualized selling and increasingly automated manufacturing, have reduced the need for human capital to enhance ROI in the ways money was made before. Thus we need more new businesses, better business models, and new applications to drive growth, and that will eventually drive the use of human resources.
But the powers that be do not recognize that the old ways must be decimated, as Schumpeter's creative destruction so clearly requires, in order for the next leadership of competitive capital management can be implemented.
That process is always inexorably happening, but governments are doing the precise opposite of what is needed to promote the businesses that will be the successes of the future. Instead, they are coddling the successes of the past and the failures of the present. In the name of preserving the middle class, which they are lying about and failing miserably if they were serious, they are increasing the pressure to take in taxes all that the middle class produces.
2012: We are in a Dangerous Interregnum to Even More Dangerous Times
Macro-economic mistakes (government error caused by centralized decision making at the idiotic level, even if well-meant) has replaced capitalist gains and losses as the driving force of decisions.
Understanding Capitalist vs. Socialist Economics
We need more disruptive technology investment, not less, and we do not mean Solyndra-like public investments in "novel" technologies that constitute crony socialism and crony capitalism. The private market does NOT work efficiently with inefficiently0generated capital that is sent to politically expedient destinations that have ulterior and non-economic motives.
The private market can generate innovative solutions and long term competitive trends only if the ideas are unfettered and properly funded, not by politics, but by cold ROI driven by capitalist self-interest. For better or worse, these things happen in generational cycles.
The last revolutionary techno-capitalistic cycle was in the mid-70's, about 35 years ago. Silicon Valley was leading the development of all the technologies that are leading today. TechVest was busy in those days. The UK was funding a majority of high-tech ventures, NOT banks or government in the USA. Here was Intel, Stratacom/Cisco, Genentech/Roche, and countless other pioneering technological developments. 35 years happens to be approximately one generation.
The next generation of private companies worth investing in is being spawned today. Google and Amazon and Apple were started in those olden days of the 70's and 80's and are super-products of that past generation. Most early investors made a killing (though patience was needed through market ups and downs, and was rewarded) because buy and hold was possible.
Because the ROI from higher-margin companies is larger, most small companies being funded today are virtual internet-based products that can be manufactured in infinite electronic duplicates that cost virtually nothing to reproduce, riding on the digital social economy which leverages people's time and ad dollars. Significant short-term gains are possible as companies are flipped into larger holding companies like Google and Microsoft.
TechVest is all about spotting and supporting the next generation of disruptive business winners. We target practical new approaches with lasting advantages that will eventually be the next superior users of the latest technology generations.
Then there are private-stage ventures that are still on the bleeding edge of unfair advantage. JenLaur, which has perhaps finally proven abiogenesis in a test tube, with nanotechnology that could transform a number of industries. MacroSonics, all about manipulation of atoms and materials with sound waves. Eye-Controls, creating truthful identification systems to put a stop once and for all to human identity fraud. No single venture group begins to address the entire next generation of breakthroughs that will support social progress and social advancement and well-being of people.
The Venture Capital industry tries to address the next waves, but has been pulled into political directions that dilute the intelligence and clarity of VC investment. Kleiner Perkins is wasting amazing amounts of money chasing political dreams that are founded in incorrect science. That is ok for private investors, but it is not ok for governments to guess or second-guess. Government subsidies skew the capitalist decision that must be at the heart of venture and capitalist investment.
Government spending is neither wise nor productive and has never been a proper stimulus. In fact, government spending merely offsets private investment. There are only two ways out of excessive debt: inflation or growth via a new industrial revolution created in the private sector.
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