A couple of weeks ago I had lunch with a friend I see regularly. I was very struck by a comment he made to me as we were talking about his investment strategies. He said to me, "Either the situation changes soon or the problems of the economy and Europe in general will become more and more complicated. I have been investing only in financial economics for several years now, not wanting to know anything about the real economy and I have done very well. Good thing I have not invested in real economy. But I'm starting to worry... This is not the way it should be!"
It has been more than five years since this crisis we are experiencing started and things do not seem to be getting much better since then. It is May 2013. In September, six years will have passed since the fall of Lehman Brothers. In Europe for a long time politicians were determined to deny reality. I cannot forget the comments of Jean Claude Trichet when he was Director of the European Central Bank: he was raising interest rates and talking about his concern for inflation, when the real economy had been at a complete standstill for months and months. The problem we were experiencing on the street was the lack of demand and the lack of access to credit to finance the working capital of our companies. The problems of the banking system were not yet evident. But the President of the ECB insisted on talking about the danger of inflation and saw a reality absolutely contrary to what those of us in the real economy, not in the financial economy, were seeing. The lack of demand is increasing and the banks are still unable or unwilling to provide credit to keep the economy flowing.
It seems to me that we are experiencing in Spain a series of events that bear enormous similarities to the world that the French knew at the end of the 18th century. A ruling class, the political class, completely detached from reality, very similar in its power to the upper strata of the Middle Ages; a citizenry with increasing problems to find meaning in its future, the middle class, less and less existing because it has been impoverished and deprived of access to jobs and financial channels on which it has relied for years and, finally, a rural population very alien to the reality that is lived in the rest of the country.
The major differences with the French 18th century are, from my point of view, two. One that affects positively with respect to our present situation and one that, however, affects negatively. The positive part is that in the case of those who live in the countryside and of the countryside, their situation has improved notably with respect to the situation in which they lived in 1783. In Europe, for dozens of years, the different governments that have succeeded one another have been concerned with subsidizing the business related to the countryside, to the point that it has been very profitable even to sow and then not to harvest. Or simply to leave the land barren. I am talking about this group of those who have land, not about the rural wage earners, who would be catalogued today among the citizens: they live in the countryside, but they are completely equivalent to the citizens who live on their salaries in the cities. They have, with respect to those who live in cities normally lower wages, but much lower costs and ability to find alternative ways of supply.
On the negative side, the population of citizens today is infinitely higher than that of France at the end of the 18th century.
Once again, two hundred years later, history seems to be repeating itself. And, by the way, something similar also happened when the Roman Empire began to collapse.
I don't want to be a tremendist, nor a negative one. But really 6 million unemployed are many families without regular income and above all, many families without hope. Many young people without a future, many adults without the capacity to find solutions for their families, losing jobs, homes, investments and their own families and many retired people with a really very complicated future when the sunset of their life arrives. And what is even worse, a system in which we had trusted, probably too much, that does not work and which does not seem to have any signs of working in the near future. And when I say the near future, I mean ten or fifteen years from now.
For young people, there is the possibility of leaving to seek a future in other countries. The best are already doing it or have already done it. Many of them will never return. Perhaps they will do it for a few Christmases or a week during the vacations so that their descendants can get to know their roots. In fact, this is what is happening now with many of those who had to leave Spain in the first half of the 20th century, who now return enriched and to put some of their savings in Spanish assets. Our government applies a euphemism to this national drama. They speak of "external mobility" and "exchange"because some students also come to Spain. The reality is that those who mobilize on our side are trained professionals, with high skills, who will never or almost never return and those who come, in "exchange" do it to spend a few months and learn a language that has already become the most spoken in the world.
This is what happens in the real economy.
What is happening in the financial economy? Everything seems to be going well. Wall Street is at highs again and money seems to be flowing. Interest rates have been lowered to 0.5% -something we citizens will never know-; Treasury bill auctions are cheaper -however, we citizens are still not able to get credit and we are not able to refinance the one we have; there is talk of tons of cash in the Balance Sheets of Banks and large companies -and we citizens do not know where we will find the money to pay our expenses next month-; the GDP falls by 1% -while our businesses or our incomes are falling at a rate of over 50%, if they have not disappeared altogether-; we are told that the recovery will come in 2014, as we were told before in 2013, or also in 2012... -for a large part of the citizens not only no recovery is foreseen, but the question is whether we will be able to build a future with what we have left and how we will manage to survive the next years-; they talk to us about improving the Laws to support small entrepreneurs, but this is something we have been hearing about for more than four years, and nothing has been produced...
And so we could write, write, and write....
This is what happens in the financial economy.
I am convinced that the politicians who currently govern us are also really worried and trying to find solutions to the incredible barbarities that have been going on for years. But I am also convinced that they are scared and in many of the decisions they should take, they are blocked. I have read Mrs. Santamaría's answer to Mrs. Aguirre when the latter demanded actions and cuts in public spending. Mrs. Santamaría told her that in these years they have eliminated more than 300,000 jobs in the Administration and had managed to bring the number of public employees to the figure with which the Zapatero Government started. This is certainly not bad. It is clear that they are managing, if these figures are real, and it is also clear that the Zapatero era will not go down in Spanish history as something positive for the country. But it is also clear that all that remains to be done is a lot and it does not seem that in this legislature, in which the party in power has an absolute majority, it is going to be able to do it. And when the next legislature arrives, in which there will no longer be defined majorities, the problems and tensions will begin. And I am afraid that they will be important.
I do not know how they are going to achieve it and I do not even know if they are going to be able to achieve it. But I am sure that they will not achieve it by working "in negative": with direct and indirect taxes. It seems that this is something that is becoming clear with the results that are being obtained from doing so and it also seems that there is a will to change this model. Hopefully, by the time the change takes place, we will still be active.
We must encourage the development of talent, creativity and the desire to create a company. The ability to take risks must be encouraged and valued. The desire to try to fly alone. And instead of pillorying businessmen and the "rich" every time the electoral results go wrong, we should encourage them to come to Spain to work, to create companies and to create wealth, and also to retire and spend among us the money they saved during their years of activity.
But for this you have to worry about the real economy, not the financial economy.
In the financial economy the important thing is the short term: that the next Bill Auction is placed and we can get more or less well to the next elections. In the real economy, the important thing is the long term. That the decisions you make today, justify a future.
It is interesting to read the recent letter published by Jeremy GranthamHe is the manager and founder of GMO, an American fund manager that currently manages more than 110 Billion Dollars. His opinion about what he believes we are doing with the world around us and about the way we are managing our civilization is truly shocking. It is not just anyone's opinion.