A change of cycle

This is something I’ve been thinking about for a while and it now seems as if it may become a reality in the near future…

What will be the result of this weekend’s Greek elections? All the signs are that there is not a single political party in Greece who wants to ‘listen to Brussels’, or, to put it another way, not one who wants to be led by common sense. It seems no-one in Greece is prepared to even talk about tightening their belt, or, to be more precise, to tighten their belt a little more. As I write this, it’s Friday and we’ll know by next Monday. If the elections turn out as expected, Greece looks set to refuse to honor its commitments to its European partners, and will end up out of the Euro only to return to the Drachma. And if that happens, it could have serious problems to find enough paper to print all the new Drachmas it may need.


On the other hand, my much-admired Alberto Artero, in his article in El Confidential , under the pseudonym McCoy, also has something to say, basing his remarks on those of Adam Posen in his article published in The Telegraph on ‘hyperinflation’. It’s a case of the wolf on your doorstep who, you hope, will never come in. Artero does so in an indirect fashion, although his meaning is clear.

Today, Friday June 15, 2012, all the Spanish newspapers, and many foreign titles, put Spain’s risk premium on their cover pages, having surpassed 540 points, which means that Spain will need to sell debt, for the first time since it entered the Euro, at more than 7% interest. A

In line with these new realities, we are suddenly heading, and fast, towards hyperinflation. So, I was wondering, where have all those people been over the last 36 months who are now expressing such surprise?

Small- and medium-sized companies have been practically unable to secure financing for over four years. And the only financing you could find was being offered at more than 7%, which, in reality, meant paying 9 or 10%. Meanwhile, the Central Banks were reducing financing costs to close to 0%. And, at the same time, small- and medium-sized companies have had no guarantees we would find financing at all.

It makes me smile when I read that loans were not offered because there was no ‘solvent demand.’ Did anyone really believe that? I believe that what we’ve been lacking, for a good few months now, is a ‘solvent offer’ of credit. In the UK, they realized this early on and immediately obliged, rather than offered, banks to take public funds so as to ensure that company financing would still be available. Meanwhile, most European politicians appeared to be more concerned with not facing up to reality while making sure banks retained solvency, but without assuming any risks on their balance sheets or losses for those who are euphemistically referred to as ‘savers’.

It never fails to amaze me. They call them ‘savers’ and yet they have been throwing money at banks to avoid losing the money these ‘savers’ have in their bank accounts. But, let it be said, those people who have invested their savings in shares or in pension funds should not be affected by a bank going bust or suspending payments. Those are savers. Not those who keep their money in bank accounts. At the same time, no-one seems to remember the small- and medium-sized businesses. And even less the small and medium-sized business owners, who are the true savers, rather than speculators.

So, my questions are: was the right strategy adopted? Who should be protected – those who park their money in a bank account or those who, on a daily basis, take our chances with our companies and our investments? We are two very different kinds of people, but which of the two is creating wealth?

Passivity has been protected. Cowardice. A lack of confidence. How much money have the Central Banks given to national banks to deal with that same lack of confidence? How much of that money has been given back to the Central Banks in the form of deposits? How much of that money has reached the productive sectors of the economy? And how much of that money has helped regain confidence? The last billion euros we’ve heard so much about created just enough confidence to last from around 9 p.m. to 2 p.m. on a single Monday.

Individuals, businesses and funds which have been caught with cash or liquid assets by the current crisis have, generally speaking, spent years trembling in fear and unwilling to invest. Without taking a risk. Without risking their confidence. Without backing those who try to create and maintain jobs. They’re terrified. And it’s those people who politicians worldwide have decided to protect. Which I think is a huge mistake.

A few weeks ago, Germany sold treasury bonds with absolutely negative returns! Which means that investors who risked their money knew they would lose some of it once the bonds were redeemed. Meanwhile, small- and medium-sized companies have been, and continue to be, treated like pariahs by banks. We’re the untouchables. Those to be avoided at all costs. It has been impossible to find funding from banks and impossible to find backing from investors, with very few exceptions. We have had to develop, and are developing, in an environment akin to a wartime economy.

As a result, I’d like to demand the Military Order of Merit for the majority of self-employed people and small and medium-sized businesses! Wikipedia defines this decoration thus: “The Military Order of Merit aims to reward and distinguish individually those members of the Armed Forces and Guardia Civil, who have undertaken acts or provided services of significant merit or import, as well as civilians who have undertaken such merit-worthy acts in the defense of the nation.’ Well, have we earned it, or not?

Those few of us who have been able to scrounge some financing, and in our case it has been very little, have done so at rates of close to 10%, and we have even had a complete dearth of funding for more than a year. Now, when you talk to someone about access to a line of credit, if you’re a small- or medium-sized company, you’re talking about rates of around 15%.

How do you define this kind of reality? Is it really so surprising that the state has to offer 7% to finance itself?

We small- and medium-sized business owners have tried to manage our companies as best we can and, in our case, at Zinkia, we’ve grown our sales gradually in international markets. We were nobody a few years ago and, today, we’re still nobody. But we are now selling in more than 15 countries, without depending on any kind of public financing. Without backing, with few resources, with a fair few enemies, and competing against established companies with much more money. Meanwhile, many states have not worried about properly managing their resources and have only concerned themselves with spending, often out of control. This has been almost ‘endemic’ among developed nations. And, if financing were still available, the states took the lion’s share for themselves, competing, in turn, against their own small- and medium-sized businesses. They, probably without even realizing it and not in bad faith, despite the disastrous consequences, have let many of those companies go bankrupt due to a lack of financing and, suddenly, are coming to the conclusion that it was those very same companies that paid the states the taxes they needed to function. But it may already be too late for that realization: many small- and medium-sized companies have already disappeared or are on their way to becoming extinct.

It’s now starting to look like what Warren Buffett said is coming true: “When the tide goes out, you can see who was wearing a bathing suit and who wasn’t…”

Now it looks as if it’s time to have a go at those who still have some money left, the dwindling middle class who are the few who still spend money, or who still have cash to spend. Now, it is time to increase VAT, extend the retirement age again, and, probably, start cutting pensions. But, meanwhile, there is still no support for small- and medium-sized business and no-one is saying ‘boo’ to those who have savings in cash. So, we’re trapped in a self-destructive spiral. What are politicians around the world thinking?

Everything is pointing towards hyperinflation beginning to run at full speed, and, when it does, those who were too afraid to invest, those who let companies fail, those who didn’t have the confidence to make the most of opportunities to take a stand, and those who protected all of the above, will all start running, too, towards an exit that will be too tight for them all to fit. All of a sudden, it will be companies who provided the best refuge against inflation and many people will want to buy into them in a hurry, fleeing from liquid assets and creating unsustainable new bubbles all over again. The same thing happens time after time. It really does make you wonder if we humans are capable of learning from our mistakes.

And those of us who, for now, are surviving, are crossing or fingers that that time arrives and we are ready for when it comes. We will go from pariahs to aristocrats overnight.

But will we ever get that far? When will they learn that, as Adam Posen noted in the article mentioned by Alberto Artero, you need to start buying assets in the private sector to generated confidence and not continue to throw money at banks, which, clearly, are prevent that money and confidence from reaching the people?

Human beings certainly do act in mysterious ways…

I’ll leave the questions of young people, education, the importance of solidarity worldwide, and environmental awareness for another post .

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