Tuesday, July 5, 2011

Greek Tragedy

You may be asking yourself: what is going on in Europe with this so-called debt crisis? Why is everyone freaking out about Greece? What's "contagion", and is their an ointment for it? Is there a financial zombie apocalypse happening? I'm going to try and answer all these questions. This is an interesting topic because people make it more complicated than it is. You can actually relate it to things like your household budget very easily.

Let's start simply, with budgets. Countries, like households, have income and expenses. Countries get income through taxes. Taxes tend to be related to a countries gross domestic product (GDP), so the more stuff a country makes, the more its government makes in taxes. If a government spends more than they earn in a given year, it is called a deficit. Do this enough, and that will lead to debt.

Debt isn't a bad thing, as long as it is a reasonable percentage of income. Most of us are comfortable going into debt to buy a house or a car. In Canada, household debt as a percentage of yearly disposable income has steadily increased from 90% in 1990 to about 140% today. The same idea can be applied to countries. For example, Canada's debt to GDP ratio is about 34%, which is reasonable. However, this is only the debt owed to Canadians, called "internal debt". We also have debt we owe to foreigners, which is about 75% of GDP. This is called "external debt".

You may be asking, how can countries have debt? Where does the money come from? Let's go back to our household. Say you buy a house and get a loan from the bank. This is "external" debt, because you borrowed from someone else. But say you want to buy a car but the bank won't lend you money. You could raid your kids college fund, or you borrow from your rich aunt. These could be thought of as "internal" debt.

How do these translate into a countries debt? Well, most countries issue bonds, which are basically I.O.U.s which both citizens and foreigners can buy. You give the government some cash and the government promises to pay you back. The interest rate the government agrees to give you depends on a how risky lending them money is. Stable countries have relatively low interest rates because they don't need to entice people to give them money. Unstable developing countries need to pay more to entice people to give them money because there is a real risk that they could default. The free market determines the interest rate on bonds. For example, the current Greek 2-year bond rate is 28% (i.e., if you lend Greece money for two years, they'll give you 28% a year interest!) Compare this to Canada's 2-year bond rate of about 1.5%.

What does "Greece has a debt crisis" mean? What it means, basically, is Greece spends more than it earns, and it can't make regular payments on the debt it owes to citizens and foreigners. As of 2010, Greece owes 165% of GDP to foreigners (mainly European banks) and 130% of GDP to citizens (mainly entitlement programs like pensions and benefits). Because they are having trouble paying people, no one will lend them any money, and if they will, it is at insane interest rates. This is like not being to pay down a credit card with 10% interest, so you get a credit card with 20% interest to try and make payments -- clearly not a sustainable situation.

(I'm going to take a quick aside here. You may be thinking, "Why do countries have to ask anyone for money? Why don't they just print it?" Some countries do that. The U.S. is doing that right now with their "quantitative easing". The problem is that unless you are a totally self-sustaining country, you have to buy stuff from other countries. If you debase your currency too much, the price for other stuff like oil and grain will just keep getting higher and higher. Eventually, when everyone loses confidence in your currency, hyper-inflation happens. For example, Zimbabwe has a $100 trillion dollar bill.)

Since Greece is a part of the European Union, the fact they are in trouble is affecting everyone. The European Union will help them out, BUT Greece has to get things under control. Foreign banks have put pressure on Greece not to restructure the debt they owe to them (restructure is a fancy term for saying: "I'm broke, so do you want some of what I owe you or none?") Internal debt is much easier to muck around with, so that is what Greece is doing.

Just like we raided our child's college fund to pay for our car, countries can do similar things. Eliminating pensions and benefits are one way. Pensions are a liability, whose cost is born by future generation. To get Greece's spending under control (so Greece can continue to pay back debt to foreigners), the EU is asking them to undertake "austerity measure" (also called "belt tightening" or "belt selling and giving the profits to banks"). If Greece does this, the EU will lend them some more money.

Let's create a detailed example to show what is going on. You buy a house, and are paying a $1000/month mortgage. You want a car, so you take the money out of your kids college fund, and are repaying that back at $500/month. Then your wife loses her job so your monthly income takes a hit. What do you do? You start getting credit cards, at progressively higher interest rates to continue living the life you are accustom, plus paying down your mortgage and replenishing the college fund. But things reach a breaking point. No one will lend you more money. So you go to your rich aunt and say, help, I need money. She looks at your situation and says, "Okay, I'll lend you the money, but you need to balance you budget. You can't spend more than your earn, so you'll have to cut back. No eating out and no new video games. If you do that, I'll lend you the money." You say, "Auntie, don't you know the bank manager? Perhaps he can reduce my mortgage so I can pay less per month?" The bank manager is not pleased to hear this, which your Aunt conveys to you. "Sorry, I think you're going to just have to stop paying into the college fund until you get back on your feet." Given all the pressure, you relent. You cut back (but wife and kids aren't happy), and the college fund payments stop, but the mortgage payments continue on at the same rate, and you get some much needed spending money to make it to next month.

Sounds like a reasonable story, right? Wrong. Greece (and Ireland) should do what Iceland did, and that is say "screw you" to the bank. Iceland had huge foreign debt, but rather than destroy their own country for some foreigners, they shared the pain all around. It isn't perfect. But defaulting is a safety valve in the capitalist system, and is required. The reason is there are always two parties to every transaction: a lender and a lendee. Both have to be kept responsible so neither abuses the system. Lenders have to do their due diligence to make sure they are lending money to people who are able to pay it back. Also, lendees have to be responsible and not take on too much debt. But when things get out of control, all parties involved need to share the pain.

Don't get me wrong, countries like Greece have to stop this insane socialist experiment and balance the books. Democratic governments always have this danger: that they will get caught in a cycle of bribing people with their money. As Thatcher said, "Socialism works until you run out of other people's money to spend."

The final issue is this stupid word "contagion". I hate it. It sounds like financial crises are colds that other people can catch. This is nonsense. The reality is if one person in a community gets laid off, then chances are others are getting laid off too. If a recession hits a community and a bunch of people's houses got foreclosed, you wouldn't say, "We've got to get this foreclosure contagion under control before it spreads to other people." The PIGS nations (Portugal, Ireland, Greece, and Spain) are in trouble because they spend more than they earn. If other nations (I'm looking at you Italy) start having the same problems, its not because they were infected with anything, but because they too spent more than they earned.

Saturday, July 2, 2011

How I Learned to Stop Worrying and Love the Mart

Revelation Chapters 6:12: "And I beheld when he had opened the sixth seal, and, lo, there was a great earthquake; and the two most unholiest of shoes were joinithed togetherith, forming a monstrosity which shall markith the feet of his dark army."

This picture was taken at Walmart, which many consider the evilest of stores. In this blog post, I'm going to try and convince you of something: Walmart isn't really that bad.

I watched a documentary about Walmart (I think it was "The High Cost of Low Price") and it made me not like Walmart. I didn't shop there for years and instead went to Zellers or Superstore. After a few years of pain and suffering, I changed my mind.

Zellers is that absolute worst store in the world for customer service. I have left my basket (full of stuff) and walked out of Zellers more than any other store I've been to. These people just do not want my money.

Question: How many idiot cashiers does it take to determine the price of a can of beans? Answer: It is actually a trick question. It takes three of them, milling about, to figure out they need to call a manager to come over and answer it. When the line-up goes back into the housewares section, it is time to get off your cell phone and open another till.

Many Zellers have self check-outs, which are awesome because 4 tills can be watched by one person, but they never use them. Instead, they have gone to the committee-of-three cashiers model because apparently they only hire people with 1/3rd of a brain. Cashiers are the one place where you want an abundance of staff, because that is where money changes hands.

The other day at Safeway, I tried to buy a chocolate bar and the scanner wasn't recognizing it. The cashier asked a bagboy to go check the price, and I said forget it. The cashier said to me, "Can I offer you the chocolate bar for 50 cents?" Impressive customer service.

Which brings me to Walmart. That store is a joy to go to. The aisles are wide, the staff are friendly, and they get you through those tills fast. There are always dozens of cashiers on.

I'm going to try and read your mind. Right now you are saying:
"But Walmart destroys mom and pop stores."
"Walmart treats its employees bad and bust unions."
"They keep prices too low." What?

Mom and pop stores suck. There, I said it. My wife worked retail for years. Small business owners are crappy to their employees. Here's an actual conversation:
  • "So, there will be a staff meeting on Sunday for 1 hour after the store closes."
  • "You know that you have to pay everyone a minimum of 3 hours, right?"
  • "What?"
  • "That's the law."
  • "I've never heard of that. I'll tell you what, I'll make it 45 minutes, and I'll bring it cookies."
  • "You can bring in anything you want, but you have to pay us for 3 hours."
My wife was never invited to a staff meeting again. You think Walmart can pull that sh!t?

I remember when I worked for Dairy Queen back in GP, the owner used to get some of us guys to go over and mow his lawn and do general yardwork -- during work hours. There is no way that is legal. The mythical mom and pop don't exist -- all business owners are dicks.

The advantage to mom'n'pop stores is that mom and pop will spend money in the community and not ship it back to corporate headquarters, or to foreign shareholders. This is one of the best arguments against Walmart. Unfortunately, it doesn't carry the weight on we look into it.

Let's take the Croc-o-pedic shoes in the photo above. Let's say they cost $10 at Walmart, which can be broken down into:
  • $5 - wholesale cost of shoes, which goes to some Chinese manufacturer
  • $2 - wages to employees
  • $2 - overhead like rent and power
  • $1 - profit to head office and/or shareholders
The problem with mom'n'pop stores is they buy the same stuff from China, but they don't have the clout to get them to lower their prices. So you get the same foam-a-geddon shoe, but its more expensive, say $15.
  • $7 - again, wholesale to China
  • $4 - wages (assuming mom'n'pop are better to their employees)
  • $4 - overhead (because they have a smaller store that is not in some industrial park, so the relative cost is higher)
So in this example, buying your mac-goofy-shoes at Walmart causes $6 to leave the community, while buying them at mom'n'pops pulls $7 out of the community. This is just ignoring the fact you spent more of your hard earned money on the shoes. The only time that mom'n'pop stores have an advantage is when they are selling locally made products. In that case, I fully support local businesses. But if you are buying Chinese-made shiny crap, then buying from mom'n'pops is just throwing your money away.

Note: I have nothing against Chinese products. They are awesome. But America really screwed up. You know the expression, "A capitalist will sell you the rope to hang him"? In the pursuit of short-term profits, they outsourced all their knowledge. So now, there is really nothing China can't make. I for one, will welcome our Chinese overlords.

On a final note, the reason these fitness shoes alegedly work is they make it more difficult to keep your balance and walk, so you have to work harder and therefore burn calories and tone your muscles. I see elderly people wearing these and I think, What the hell are you doing, this is going to make you more likely to fall. I guess you'll lose a bunch of weight when you are in the hospital with a broken hip.

Tune in next time when we open the Seventh Seal of the Apocalypse!