Views from the streets of the former East Germany, Poland, and other interesting places

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If you are a regular reader of this Newsletter you will know I believe in learning from people with ‘feet on the street’, and from business operators who understand the detailed risk/reward metrics of the industries they work (or worked) in. I found our Baltic trip, and the conversations I had with the tour guides, restaurant waitresses, taxi drivers, and other ‘main streeters’ we met hugely interesting and informative. Certainly the older and younger people I met represented a broad cross-section of age groups, educational backgrounds, and ‘life experiences’. A number of the older people I spoke with had lived as children and young adults under communism, and as mature adults in a form of ‘free enterprise regime’ after either, depending on country, 1989 or 1991. Three of the countries my wife and I visited (Estonia, Finland and Germany) are part of the 17 country Eurozone. All the countries visited except Russia are part of the 27 country European Union.

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Here is a summary of things that I learned and think important:

• without exception, the ‘people on the street’ I met were far more interested and better informed with respect to what is going on economically in Europe generally, and in the Eurozone in particular, than is any cross-section of ‘main street’ Americans or Canadians I know.

You might say that is to be expected, given they live in or close to those geographies. Then again, I am concerned (and strongly believe everyone should be concerned) about the contagion issues that may arise in the United States (in particular) in the event of a continued escalation of the Eurozone’s financial crisis, and the current United Kingdom double-dip recession. Accordingly, if you read this Newsletter you know I believe those in the U.S. and Canada who care about their economic futures ought to know a lot more than most seem to about economic events developing outside North America;

• there is great concern among all those I spoke with respect to the Eurozone – and in particular with:
• Spain’s economic future, and to a lesser degree that of Italy, and
• their perception of the role Germany will have to play for the Eurozone to survive in its current form – and whether Germany indeed will do that;
• there was no real consensus among the many people I spoke with as to whether the Eurozone would survive in its present form, or whether in the end the euro would survive in a different structure than it currently does.

That said, the majority of the people I spoke with thought that on balance Germany would support the euro and the euro will survive for at least the time being. Three of the people I spoke with, each of who I consider to be among the best informed and thoughtful of my ‘people on the street’ were pessimistic with respect to the long-term survival of the euro;

• to a person every ‘mainstreeter’, irrespective of country, expressed concern with youth unemployment issues, and in some of the eight countries we visited (most notably Latvia and Poland) with the fact that young people were leaving to search elsewhere for jobs;
• while no surprise, people of all ages in Denmark were to a person the happiest, and the ones most positive about their country’s system of governance;
• those who lived in the former Soviet Bloc countries and in St. Petersburg were the least positive about their own personal prospects – but to be fair, those countries (or at least what I saw of them) struck me as being in a continuing state of economic transition. That struck me as also being true of the former East Germany area we visited, notwithstanding the now over 20 years of West German subsidization to this area; and,
• the people I spoke with in Estonia, Latvia, Poland and Russia itself were the ones that seemed most concerned with possible prospective inflation.

In summary, I am very glad my wife and I took the trip we did. I had visited Denmark previously, West Germany many times, and East Germany just after the Berlin Wall came down in 1989. I had not visited the other countries previously. That said, I:

• found nothing on ‘main street’ in those countries particularly surprising,
• thought the ‘main-street’ people I spoke with seemed far more informed than I expected them to be, and certainly far more informed on a lot of what we discussed than I was,
• was particularly impressed with the abilities, educational diligence, and balanced views of most of the people I met and spoke with. In particular, some of the young students I met where linguistically astonishing and accomplished. I can assure you I would bet on them in any contest where our North American ‘young adults of privilege and entitlement’ were contesting a ‘be first to get the dollar on the floor’ if there was only one dollar there, and
• otherwise confirmed, for me as a non-statistically valid sample, many of the macro-economic concerns that I have been expressing from some long time in this Newsletter.

The other thing I confirmed – again based on a non-statistically valid sample – is what I consider to be the broadly uninformed and U.S. centric attitude of at least some Americans. When I asked an American I met on the trip – who was not retired, and who worked in the U.S. public service – what his thoughts were with respect to the ongoing financial crisis in the Eurozone his immediate and curt reply was: “I don’t know anything about it and could care less. I only care about what happens in America in my area of expertise”. Certainly many Americans I know are thoughtful, caring and well informed people. That said, I believe the attitude I experienced is all too often an American ‘first responder’ answer to a lot of things. Simply put, I think the sort of answer I got from one American on our trip has a very high probability going forward of biting him in the precise spot I suspect he doesn’t want to be bitten. North America >> United States: U.S. Politics – how can this make sense? Why read: Because if the statistics quoted in this commentary are even close to being accurate – which I have not independently verified – you ought to know and think hard about them. Commentary: A recent article suggests that of all Americans:

• 0.26% give more than $200 to congressional campaigns;
• .05% give the maximum amount to any congressional candidate (which for individual contributions is $2,500 – see Contribution Limits 2011-12;
• .01% give more than 10,000 in any election cycle; and
• .000063 (or 196) have given more than 80% of super-PAC (Political Action Committee) money spent to mid-2012 on this year’s presidential election campaigns.

The obvious question that arises from this is: following from the foregoing, how much influence does a very tiny (or even microscopic) percentage of the American population wield on American politics and ultimately legislation? My own answer is that in a country that holds wealth in very high esteem, almost certainly a very great deal of influence. Assuming I am right, I can’t see how that augers well for America going forward. I suggest you think about the foregoing and reach your own conclusion. Topical Reference: Big Campaign Spending: Government by the 1%, from The Atlantic, Lawrence Lessig, July 10, 2012 – reading time 2 minutes. Brief Commentaries prompted by world headlines Eurozone >> Greece >> Spain: Greek Needs More – Spain Deficit Why read: To focus on how government expectations in current economic times are not being realized, to consider whether that ‘expectation error rate’ is being exacerbated by uncertainties beyond the control of those governments, and to reflect on how wrong predictions – government or otherwise – may impact the financial markets in coming weeks and months. Commentary: Apparently in the past few days Greece has said they need an additional 2.5 billion euros over the 11.5 billion euros agreed, subject to the Greek government introducing austerity programs, only a few short months ago. Does this mean that Greece is facing escalating costs, that the Greek government simply is inept at estimating its requirements, or does it mean something else entirely? Concurrently, it has been reported that Spain’s tax revenues are much lower than had been forecast. It doesn’t seem fair to say such a thing could not be anticipated, since Spain’s unemployment rates and property problems have been well know for some long time – and should have been properly accounted for in the Spanish Government forecasts. It seems more logical to attribute this shortfall to poor government forecasting, or forecasting by civil servants and government officials who are playing ‘pin the tail on the donkey’ – a game played by blindfolded children. I continue to believe that things will be reported as progressively worsening from an economic point of view in Greece. I also continue to believe that it is very likely that the auditor reports on the Spanish banks, now due in September, will result in disclosure that Spain’s banks are in worse financial shape than the Spanish Government seems to think they are. Topical References: Greece Shortfall Rises another 2.5 Billion Euros to 14 Billion; Proposed Solution is Zero Interest Rate on Emergency Loans, Mish’s Global Economc Trend Analysis, Michael Shedlock, August 20, 2012, reading time 3 minutes; and Spain Predicts 4.3% Increase in Tax Revenues, Actual Results are 3.5% Drop; Proposed “Solution” is More Tax Hikes, Mish’s Global Economc Trend Analysis, Michael Shedlock, August 20, 2012, reading time 3 minutes. Important Snippets From Today’s Commentaries Snippet #1: If you read this Newsletter you know I believe those in the U.S. and Canada who care about their economic futures ought to know a lot more than most seem to about economic events developing outside North America. Snippet #2: Wrong predictions – government or otherwise – may impact on the financial markets in coming weeks and months.

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