Wednesday, June 29, 2016

Expat's dilemma: should I stay or should I go?

Today I am going to talk about the typical sentences a family father answers when he is asked about the reasons why he does not leave his Country, if he is already finding himself in a bad economic or working situation, with fewer and fewer perspectives of improvement.
I took inspiration from this article, and I tried to adapt it according to my European/Italian background, my age, my education and my working skills.

"My parents and grandparents were born here; I have roots in this country/I'm not going to be unpatriotic. " : Italians have never been very patriotic nor nationalistic, and this statement does not apply to me. My grand-grandfather left Italy for America and then came back. However, it is true that when you leave your Country, you have to take into account that long-dated and true friendships are harder to find, simply because real friendship is achieved after living common experiences. You may find very good acquaintances, good colleagues and good neighbours, but friendship is another thing. Fortunately, there are cheap flights, and there are social networks. You will not loose your friends, you will only see them less frequently. Coming back to patriotism, it is funny that those politicians or people who have thrown in the flush our economics and well-being, by adhering to the eurozone disaster without safety precautions and claiming we are a whole super-nation, now are accusing those who fly away of being unpatriotic if they decide to move to another state of their super-nation.

"I can't leave my aging mother behind." : well, my mother died in my thirties, and I was working hard abroad at that time. It was a terrible, terrible period. She was dying, but I had to work for a living and I had to travel back and forth from Europe to America. For sure, if your parents need care and are not self-sufficient, it is a hard decision to take. Nevertheless, just try to think to your children too. If you cannot give your children a better future, or even your living standards when you were their age if you stay in your Country, what are you going to do? Your parents will pass away in any case. If you can earn more money by moving abroad and pay better medical care to your aging mother, who is going to stay back in her homeplace, is it not a good choice to leave in any case? Or, even better, you can bring her with you, to your new place. For sure the problem would be the language if she decides to have a talk with the grocery guy, but if she can do that, then she is not in such a bad shape and you can leave the country with less apprehension.

"I don't have enough capital to make a move." That is exactly the reason why you should be moving! If you are in your forties (like I was when I decided to leave Italy with my family), and you are struggling to get to the end of the month with your money, trying to live a decent life with a decent car and decent holidays, what the hell is preventing you from moving abroad if you are confident that you will earn more money and maybe have more free time to spend with your family or for yourself (ie going to the gym, reading, studying)?

"I don't speak the language." That is YOUR fault. You need to learn English as a minimum. English courses are super cheap today. If you are Italian, it is easy to learn Spanish or French. If you move to Germany/Netherlands, it is very often the case that if you speak only English, that is enough at the beginning. You can learn German/Dutch at work or by attending evening courses. They are typically reimbursed or paid completely by your Company. Of course if you are reading now, it means your English is already good. Be aware that to learn a new language may be more difficult when you are older, for a simple reason: first, you have less time to study; second, if you are an educated person, your native language is already complex, so it is hard to learn to re-formulate concepts in a simple new language. You have to "de-complexify" your way of talking.

"I am too old to leave.".  I was 41 when I left with wife and children. I know people who left at 53. The question should be another: is the salary and the living standard I get there worth the effort of leaving? the new experiences I can make in another Country are worth the struggle to get used to new weather, food, sunlight, habits, etc? So, take a piece of paper and start writing, next to each other, pro's and con's  for staying or leaving. Try to be objective, not emotional. These decisions will affect your future and the future of your family. By the way, do you think you will get your pension at 65? well, if you do, you are very optimistic. It may be the case that you will have to work until you are in your seventies. So if you are 50 and healthy, you are still young for working.

Of course everybody has his own experience and story to tell: on average, it is easier for a graduated guy to leave Italy in his late twenties, it is harder for an older guy with a family. The older guy takes more risk, undoubtedly. If both parents work, maybe only one can move to another place at the beginning. But I want to stress out the point that you leave your country if you are not feeling well staying where you are, not if you are happy with your environment and working conditions, of course! In my case, I hated the place I was living in, most of my uneducated neighbours, the traffic, the impoliteness of Rome people, the crisis my company was experiencing. All this was a powerful driver and motivator for me to fly from Italy, counting only on my brain and working experience. I did not want my kid to raise with uneducated boys, speaking dialect. There would have been good people around him, of course, but I would have had to fight for poor school teachers and organization. A good hospital was 30 Km away, due to crisis cuts in medicalcare in Italy.
Taxes were raising, services were getting worse, policy makers were still the same of 2008, press was giving wrong information about the root causes of the crisis. Did I need other inputs for leaving my Country?

Monday, June 27, 2016

Home Sweet Home - Property bubble (an example in Amsterdam)

Last time, in our Home Sweet home series, we discovered that:

1. For our parents, thanks to inflation, the house was a good asset: it used to raise in price and, with a fixed rate mortgage, the percentage of the monthly payment was becoming smaller and smaller through time.
2. Today, due to deflation, it may be convenient to stay under rent for some time, since the house is not increasing in value. In addition, interest rates are dropping: so I showed that by simply waiting one year, you actually ended up in saving money, even paying a high rent in the meantime.

This is something that it is completely counter-intuitive for the past generations. My father still uses to tell me that to be under rent is a waste of money. He is fundamentally right: it is the present world that works upside-down. But we have to live with that.

Let's discuss now an example of what a property bubble means.

In economy, we refer to a bubble as a condition in which some particular asset (it may be your house, but also gold, stocks, commodities, oil) is increasing its value without any apparent fundamental reason, simply because the people (or the investors) are so sure that the asset is going to raise its value, that they buy it. Therefore, there is a strong demand, the price of the asset raises, which on its turn stimulates more demand, which raises the price etc.

If you are not aware of what a property bubble is, and how to recognize it, you may end up very badly! Because all bubbles pop, sooner or later: the decrease in value occurs abruptly, in a very short time, and if you bought a house when it was very expensive, you may find yourself with a house whose market value does not even cover the residual mortgage.

Let's use this real example, taken from a house in a nice town close to Amsterdam, built in 1971.
NOTE: in the Netherlands in the real estate websites, you may find precious info about the past prices of the houses. In Italy it is not possible, real estate agencies do not provide this information.

Price as of 2007: 695000 €
Price as of 2009: 599000 €
Price as of 2016: 415000 €

So, in 9 years (from 2007 to 2016), the house has lost 280000 €, that is MINUS 40% of market value.
Bear in mind that if you had bought this house in 2007, you were paying roughly 5,3% of interest rate for a 30 year mortgage to the bank.

In such conditions, in 2016 you would still own the bank 525000 €. 
In other terms, the present market value of the house (415000) does not even cover the debt to the bank (525000)!
To put it bluntly: a TOTAL DISASTER! 

The question is: how do you realize that the real estate market is in a bubble? This is important, since you need to avoid buying a house when the price is close to its peak. 
The other question is: how is it possible that the houses first became so expensive and then lost so much value in the following years?

To answer the first question, that is to find the means to defend us and our families from a financial disaster, we need first to answer the second question.

In other terms, we need to understand what CREDIT is, how it is born, where it comes from, and what forces jointly act to expand it or to shrink it.

We will see that CREDIT and INFLATION are very tied concepts. And that they have a huge influence upon our everyday life. 

It took me years to understand these concepts and to join the dots: if you follow me, I am confident that you will have in a few weeks the tools to take better decisions.

TAGS: inflation, deflation, house, real estate, mortgage, bubble

Sunday, June 26, 2016

Guest Post - The Gold Standard: Generator & Protector of Jobs

NOTE: the following post was written by Hugo Salinas Price, and is available here.

It is not for absolute beginners, but it highlights some very important points about the neverending crisis we have been experiencing in the Western Countries.

Red emphasis is mine.

Enjoy the reading!


The abandonment of the gold standard in 1971 is closely tied to the massive unemployment the industrialized world has suffered in recent years; Mexico, even with a lower level of industrialization than the developed countries, has also lost jobs due to the closing of industries; in recent years, the creation of new jobs in productive activities has been anemic at best. 
The world's financial press, in which leading economists and analysts publish their work, never examines the relationship between the abandonment of the gold standard and unemployment, de-industrialization, and the huge chronic export deficits of the Western world powers. Might it be due to ignorance? We are reluctant to think so, given that the articles appearing in the world's leading financial publications are written by quite intelligent analysts. Rather, in our opinion, it is an act of self-censorship to avoid incurring the displeasure of the important financial and geopolitical interests that are behind the financial press.
In this article we discuss the relationship between loss of the gold standard and the present financial chaos, which is accompanied by severe "structural imbalances" between the historically dominant industrial powers and their new rivals in Asia.
World trade before 1971
From the end of World War II through the 1960s, all well-governed nations in the world sought to maintain a constant balance between their exports and imports. They all wanted to maintain a situation where they exported more than they imported, so that they could accumulate growing Treasury reserves of gold, or in its defect dollars, which, under the terms of the United States (US) promise in the Bretton Woods Agreements of 1944, could be redeemed by any Central Bank that requested gold in exchange for its dollars.
To be precise, we cannot fail to mention one exception. The exception to the rule was none other than the US. All well-governed countries sought to export more than they imported, except the US.
The US was not overly concerned with maintaining a balance between exports and imports, because - according to Bretton Woods - the US could pay its export deficits by the simple expedient of sending more dollars to pay its creditors. As the sole source of dollars, the US had a clear advantage over the rest of the world; they could pay their debts in (redeemable) dollars that they themselves printed.
Economists of the day warned of the danger of this practice, which resulted in a constant loss of American gold. From over 20,000 tons at the end of World War II, US gold reserves dropped year by year as certain countries, notably France, insisted on redeeming their dollars for gold at a rate of 35 dollars per ounce of gold. France incurred intense displeasure in Washington and New York due to its demands for gold in exchange for dollars; some analysts attribute the unrest in France in the spring of 1968 to covert operations by the US intelligence services, in a show of America's disapproval of the behavior of France, led at the time by General Charles de Gaulle.
The US did nothing to slow the loss of gold. In the early months of 1971, Henry Hazlitt, a solid classical economist, predicted that the dollar would have to be devalued; he said it would be necessary to increase the number of dollars that would be needed to obtain an ounce of gold from the United States Treasury. Only months after his warning, the dam burst, and in August 1971 the US was forced to devalue its currency, because the amount of gold in its reserves had fallen to a dangerous level. (Today, many doubt that the US has the 8,000 tons of gold it claims to have in its vaults at Fort Knox and the US Military Academy at West Point, N.Y.)
What Henry Hazlitt never imagined was that instead of devaluing the currency - the recommendation of Paul Samuelson, Nobel Prize Winner in Economics, published the week before August 15, 1971 - President Nixon took the advice of Milton Friedman and declared that from that time forward the US would no longer redeem dollars held by the world's central banks at any price. The US unilaterally violated the terms of Bretton Woods. In effect, it was actually financial bankruptcy.
Since then, all world trade - or most of it, as the euro, the pound sterling, and to a lesser extent the yen all compete with the dollar - is conducted using dollars that are nothing more than fiat money, fake money. Because all the world's other currencies were bound to gold through the dollar, the immediate consequence was that simultaneously they also became fiat money, fake money with no backing.
Consequences of abandoning the gold standard
The consequences of that fateful day have overthrown all order and harmony in economic relations among the nations of the world, while facilitating and expediting the global expansion of credit because part of the dollars exported by the US ended up in the reserves of Central Banks around the world.
Countries began to accumulate dollars as the expansion of credit in the US advanced inexorably, now free of the restraint formerly imposed by Bretton Woods. The rest of the world was forced to accumulate dollars in reserves, because having insufficient dollar reserves, or having reserves that did not grow, or worse, having falling reserves, was a clear sign for monetary speculators to attack a country's currency and destroy it with devaluation.
As the loss of gold ceased to be a limiting factor, the last restrictions on the expansion of credit were stripped away. A heavy flow of dollars to all parts of the world spurred the expansion of global credit, which did not stop until 2007. The international banking elite always strive to obtain greater profits and to that end always seek to expand credit. Starting in 1971, freed of the restraint of being required to pay international accounts in gold, or with dollars redeemable for gold, the constant unfettered creation of credit and still more credit ensued. It was boom time in the US.
The US, which paid the rest of the world with its own irredeemable dollars of no intrinsic value, lauded the adoption of "free trade" and "globalization". The US could buy whatever it wanted, anywhere in the world, in any quantity, and at any price. Starting in the 1990s, its export deficits became alarming, but nothing was done to reduce them; on the contrary, they grew year by year.
Mexico, following the US example, joined NAFTA - the North American Free Trade Association. Down with import tariffs! Free trade with the world! The new vision offered the enthralling, seductive picture of a globalized world without borders, where everyone could buy and sell where they liked, with no limits. The 90's were years of unbridled optimism for globalization!
Free Trade is unquestionably beneficial for humanity at large. It is good to be able to buy goods where they are cheapest; some countries enjoy conditions that favor them in production of certain things; each country should produce those things in which it has an advantage over other countries. Thus, the whole world can benefit from the good things each country has to offer. It is an appealing and sound doctrine, but… there is a crucial catch: the doctrine of Free Trade was conceived for a world where the sole means of payment was gold. When the doctrines of "Free Trade" and the "Comparative Advantages of Nations" were developed, the economists of the day could not imagine a world that did not use gold, but instead relied on a fiat money that could be created at will by a single country.
The "globalization" of the 1980s and 1990s and to date is based on the ideas of "Free Trade". However, in the absence of the gold standard that existed when the doctrine was conceived, "globalization" had completely destructive results, which have caused the de-industrialization of the West and the rise to power of Asia.
In the decades prior to 2007 a massive fleet of cargo ships was created, which sailed for the US and Europe - the West in general, Mexico included - bearing all kinds of inexpensive, quality products made in Asia. The flood was so great that local factories in the Western World were forced to move to Asia, to employ cheaper labor and continue to sell their products in the West.
My readers will know how many industries, large and small, have ceased to exist in the US and the West in general, because Chinese competition killed them. They will know as well how hard it is to find a product that can be produced at a profit in the developed countries. It is very difficult to find a niche for any product to be manufactured locally. The flight of factories to Asia to take advantage of lower wages caused unemployment where local factories were closed. For the same reason job creation is slow or non-existent.
A taxi driver in Barcelona told us: "Spain is a service economy. Industry is no longer our foundation. If tourists stop coming, we'll die." By the same token, it has been said of Greece: "It produces olive oil and tourism, and nothing more." The US, industrial colossus of the post-war world, has been de-industrialized. Now, what are developed countries to do to create jobs?
Diagnosis of the evils of de-industrialization and unemployment
These evils appeared because gold was eliminated as a) a constraint on the expansion of credit and the creation of money, and b) the only form of payment of international debt.
Under the gold standard all players in international trade knew that it was only possible to sell to a country that sold something else in turn. It was not possible to buy from a country that did not buy in turn. Trade was naturally balanced by this restriction. The "structural imbalances" so commonplace today were unheard of.
For example, in 1900, Mexico could export coffee to Germany because Germany, in turn, exported machinery to Mexico. Germany could buy coffee from Mexico because Mexico, in turn, bought machinery from Germany. Each transaction was denominated in gold, and as a result there was a balance based on an economic reality. Because there was balance in world commercial relationships, a relatively small amount of gold sufficed to adjust the international balance. The world financial center which acted as a "Global Clearing House" was London. A few hundred tons of gold were sufficient to meet the needs of that Clearing House. For further reading on the function of London as a clearing centre for world commerce, see "Real Bills" and associated articles by Antal E. Fekete at
Another example: In 1930, the US could sell very little to China, because the Chinese were poor and lacked purchasing power. Because the US sold very little to China, at the same time it could buy very little from China. Although prices of Chinese products were very low, the US could not buy much from China, because China did not buy from the US - China was poor and could not afford American products. Thus, trade between China and the US was balanced by the need to pay the balance of their transactions in gold. Balance was imperative. There was no chance of "structural imbalance".
Under Free Trade with the gold standard, the great majority of transactions did not require movement of gold to complete the exchange. The goods exchanged paid for each other. Only small remainders had to be paid in gold. Consequently, international trade was limited by the volume of mutual purchases between parties; for example, Chinese silk paid for imports of American machinery, and vice-versa.
The gold standard imposed order and harmony. If President Nixon had not "closed the gold window" in 1971, the world would be radically different today. China would have taken a century or more to reach its present level. China could not buy much from the US, because it was poor; therefore, China could not sell much to the US.
All this changed radically with the abolition of the gold standard.
Everything changed because the United States, having removed gold from the world monetary system, could "pay" everything in dollars, and without the gold standard as a limiting institution, it could print dollars ad libitum - without limit. Thus, in the 1970s the United States started to buy huge amounts of high quality products from Japan, while the Japanese boasted: "Japan sells; Japan does not buy." A situation that was impossible under the gold standard became perfectly possible under the fiat dollar standard. The Japanese became gigantic producers, their country an island transformed into a factory. Japan accumulated vast reserves of dollars sent from the US in exchange for Japanese products. This in turn triggered the de-industrialization of the US.
Take for example the US manufacturers of T.V. Some of the famous US factories that built TV receivers by the millions were "Philco", "Admiral", "Zenith", and "Motorola". The Japanese had better and cheaper products, and since the abandonment of the gold standard allowed Japan to sell without buying in turn, and allowed the US to buy without selling in turn, the result was that all the huge factories producing these TV's in the US were closed down. That's how "going off gold" closed down US industry.
Unlimited purchases from Japan flowed to the US and the world, because they were paid in dollars, which could be created in unlimited quantities. The balance the gold standard had imposed disappeared and imbalance took its place.
After 1971, the US embarked on a protracted, large-scale expansion of credit. As the nation was de-industrialized and high-paying jobs in industry disappeared, a lack of disposable income for the population was replaced with easy and cheap credit, to conceal the stagnation in per capita income. Consumer credit drove imports from Asia and furthered de-industrialization even more. The great expansion of American credit was made possible because the gold standard, which restrained the expansion of credit by the banking system, had been abandoned. It is no coincidence that some analysts have observed that in real terms, American workers have had no real increase in their income since 1970.
All mainstream economists consider the elimination of the gold standard perfectly acceptable. They still do not see, or do not want to see, that the "Law of Unforeseen Consequences" is at work: the enormous advantage the US gained by being able to pay unlimited amounts in irredeemable dollars has become the fatal cause of the industrial destruction of the US - and of the West in general. A Mexican saying applies: en el pecado llevas la penitencia - "sin brings with it its own punishment".
The current malaise: financial crisis, industrial crisis, crisis of unemployment
Today the situation is far worse. China, with a population of 1.3 billion, has become a formidable power. No one can compete with China in price. China sells vast quantities of goods to the rest of the world, without the rest of the world having any chance of selling similar quantities to China, and China can do so, because today trade deficits are "paid" not in gold, but in dollars or euros or pounds sterling or yen, which will never be scarce: they are created at will by the USA, the European Central Bank, the Bank of England, or the Bank of Japan.
A fearful monster has been created as a consequence of the elimination of the gold standard, which imposed a limit: "You can only sell to those who sell to you; you can only buy from those who buy from you." This limit no longer applies; everything is disarray, inequality, imbalance; "structural imbalance" prevails because we no longer have the gold standard.
The credit expansion boom has ended, and in its place we have a global financial crisis. Today the problem of "structural imbalance" and the de-industrialization and unemployment it has produced in formerly industrialized countries acquires greater relevance with every passing day. What is to be done with the masses of jobless men and women? No one knows the answer, because the answer is not acceptable to the thinkers of today: the correction of "structural imbalances" and re-industrialization, in other words the creation of new jobs, lies in restoring the gold standard worldwide.
The "globalization" so highly praised by the financial press in recent years, has become the worst imaginable nightmare. It is no longer possible to support the unemployed with government handouts. The Sovereign State is close to bankruptcy. Thus, nature takes its revenge on those who dared violate its laws by seeking to impose false money on the world.
Richard Nixon's elimination of the gold standard has proven to be the US's best possible strategic gift to China and the rest of Asia. Today, China has a colossal industrial base that might have taken centuries to build, while the US is to a great extent devoid of factories and incapable of reclaiming its former glory. How tragic a fate for the US! 
International and National Commerce
The word "commerce" is defined in the Concise Oxford English Dictionary as "Exchange of merchandise or services, esp. on a large scale [ French or from Latin COM (mercium from merx mercis merchandise)]
Note that the "exchange of merchandise or services" cannot include as a complement to that exchange a fictitious payment with fiat money, which is neither merchandise nor a service, but rather a paper note or digital entry denoting a debt payable in nothing. In the case of the dollar, the debt is a debt of the Federal Reserve and registered accordingly on its balance sheet. A debt cannot be settled by tendering a debt instrument (which is payable in nothing in any case) and in effect, Balance of Payments debts have not, by any means, been settled in international commerce since 1971.
The non-settlement of international balance of payments debts has produced the accumulation of huge fictitious dollar reserves on the part of exporting countries, since 1971. The same holds for fictitious payments of export deficit debts with euros, pounds, yen or any other present-day currency.

Gold, up until the Bretton Woods Agreements of 1944, figured as the complement to the international exchange of merchandise or services and did settle outstanding balance of payments deficits, because it was a merchandise or commodity used as money.
According to the Bretton Woods Agreements, the fiduciary dollar was accepted as being as good as gold, with trust on the part of Central Banks upon the ability to redeem the dollar into gold. From 1944 up until 1971 then, these fiduciary dollars were held in Central Bank reserves as a credit call upon US gold; the final payment had not been effected and was delayed as a credit granted to the US until the dollars held in reserves were to be cashed in for gold at some future date.
As it turned out, the "fiducia" or "trust" was misplaced, for in 1971 the US reneged on the Bretton Woods Agreements of 1944, "closed the gold window" and stiffed the creditor countries. No final settlement of international commerce debts took place in 1971, nor has any taken place since thenthe truth of this statement is obscured by the mistaken idea that tendering a fiat currency in payment of an international debt constitutes settlement of that debt.
Once that false idea - that fiat money can settle a debt - is accepted as valid, then the problem of the enormous "imbalances" in world trade becomes an insoluble enigma. The best and brightest of today's accredited economists attempt in vain to find a solution to a problem that cannot be solved except by the renewed use of gold as the international medium of commerce.
Regarding national commerce, the same reasoning applies. In reality, no one engaging in commerce in any country in the world today is actually paying for purchases, that is to say, there is no any actual settlement of any debt. All individuals, corporations and government entities are merely shuffling debts (payable in nothing) between themselves, in the form of either paper bills or digital banking money, whether in dollars or any other currency in the world.
For internal national commerce the smaller value of the silver coin was convenient for day-to-day transactions at the popular level and did constitute settlement of debt when tendered in payment, for silver is a merchandise or commodity which, like gold, can participate in commercial exchange.
Today, China and the other great Asian exporters have belatedly realized that the dollars they received as "payment" for their mass exports are nothing more than digits in American computers. If the Chinese do not cooperate, the bankers in New York can erase those digits in half an hour, and leave China with no reserves.For this reason, the Chinese and Asians in general are buying gold, and will continue to buy it indefinitely: computers cannot erase gold reserves.
The awful truth about China is that the Chinese acquired their formidable industrial power in the short span of thirty years at a tremendous cost: for thirty years they worked for nothing. China has $2.5 Trillion of reserves; China does not have any use for these reserves, they have no intrinsic value and China does not know how to get rid of them in exchange for something tangible of value; these reserves are nothing more than digits in computers in the Western world. Net, net, net: China worked for thirty years to provide the world with a vast quantity of merchandise, in return for: nothing! Thirty years of slavery, to build an industrial empire!
Mexico: forced to use the protectionist "Band-Aid"
Mexico has its oil, perhaps more than we are told. Let's hope so! Our economy is less complex, less sophisticated, than the US's. According to a Mexican Treasury study carried out in 2007, 85% of Mexicans have no bank accounts - a good sign that they can get by on paper money and are not getting into trouble with credit card debt. The Mexican economy, as we see it, is like a broad, low pyramid. It is more stable than the American "skyscraper" economy, a highly complex economy. Mexico is better equipped to survive the present crisis than the USA.
In today's great world financial crisis of false money, we are likely to see countries around the world resort to protectionism: the leaders will be the same countries that so recently sang the praises of "globalization". In this probable case, Mexico will have to do the same. It is a far from ideal scenario, but it is imperative for lack of the gold standard. Protectionism limits productive efficiency in any country because it limits the market for its protected products to its own national market. A limited market hampers efficiency. The supply of goods available to the population will be more limited and probably of lower quality at higher prices. (Protectionism will have similar effects in the US.)
Mexico will have to restrict imports in the near future. Otherwise, we will suffer serial currency devaluations. Protectionism is not the best policy, but Mexico will probably be forced to resort to it, for lack of the gold standard, which would be the best means of creating jobs in the US, in the rest of the "developed" world and here.
The effective cure
If Mexico aspires to anything more, we shall have to wait for the restoration of the gold standard worldwide. In the meantime, neither demagogy nor Socialism will solve our problems. Only the gold standard can do that.
For our industrial capacity to gain access to international markets - and for Mexicans to gain access to products from international markets - it will be necessary to restore the gold standard. Bilateral trade agreements are not optimum. The optimum is to have the world as a market, where payment for exports is balanced by imports and residual balances are paid in gold. Payment in gold of export deficits and collection in gold of export surpluses is sine qua non. Under the gold standard, Mexico would achieve sustainable prosperity and full employment for our admirable workforce.
Products from China and Asia in general, which today undermine our industrial capacity and create unemployment because we cannot compete with the extremely low wages of the Asian countries, would cease to be a problem under the gold standard; if the Asian countries, which today invade our markets, do not buy similar quantities of Mexican products - which today they do not - they would not be able to export their products to Mexico. The gold standard would fairly balance exports with imports; it would prevent the strategic destruction of our industry and protect us naturally, without the need for protectionist barriers.
The same therapy Mexico needs - the restoration of the gold standard - is what the world requires to regain economic health and sustainable prosperity.
Under a restored gold standard, Americans will not be able to purchase goods from China, unless China purchases American goods with a similar value. If the Chinese find nothing of value to purchase in the US, then Americans will be unable to purchase Chinese goods. It's as simple as that! To continue selling to the West, China will have to open wide its doors to imports!
If Americans find they simply cannot purchase Chinese goods, Americans will manufacture those goods themselves. Industries and new jobs will spring up like mushrooms immediately, to satisfy American demand. International balance will be restored, unemployment will disappear.
Protectionism is not a cure, it is a Band-Aid. Mexico will not achieve the prosperity of which it is capable through protectionism nor by resorting to Socialist measures that crush the creative spirit of the individual. Nor can we succumb to renouncing our nationality and accepting absorption by the US, imitating all the (very costly) measures the current US administration imposes on its citizens. The ideal combination for Mexico includes a moderate dose of nationalism, a government that does not incur deficits, the institution of a monetized one-ounce silver coin, the "Libertad", to stimulate and protect savings, and eventual participation in a new global gold standard, in which our nation can find the opportunity to fulfill its destiny.
"The gold standard is the generator and protector of jobs."

Saturday, June 25, 2016

Home sweet home - rent or mortgage?

Last time in the "Home sweet home" series, we discovered that for our parents, and grandparents, the house was an effective asset, for two main reasons:

1. The house market was expanding, so your house was becoming more and more precious. In other terms, its price was continously rising. If a price rises, all things being equal, it means that there is a strong demand for it.

2. Thanks to inflation, if you got a fixed interest rate mortgage since the beginning, you were in a good position: your wage was increasing, while the monthly payment was fixed. Heaven on Earth.

We may ask many other questions, notably:

  • Was inflation raising at a faster pace than the wages? Why were houses so demanded and so why was the real estate market expanding? 
  • Was the house market raising in price at a faster pace than the wages?
  • Why was there so much inflation in those years? 
  • Is inflation good or bad?
All these fair questions require time to be replied. One single post is not sufficient. That is why I think that understanding some basics principles of macroeconomics is essential to a family father who is about to purchase a house nowadays.

Exit Economics is voted at explaining average Joe what is better for his wallet in these days.

Nowadays I am asking myself on whether it is time to buy a house here in the Netherlands. Or if it is better to stay a still longer under rent.

Let's crunch some numbers.

  • In 2015, they would grant me a 30 year mortgage of 300 thousand euros at 3.1% rate.
  • In 2016, they have proposed me the same 30 year mortgage with a 2.1% interest rate.

The house market has not increased in this year, in the area where I live. But let's suppose that the house I liked is worth now 320 thousand euros, and not 300 thousand, as before.

For the sake of simplicity, let's assume that the mortgage covers 100% of the purchase of the house.
Let's suppose I am paying 1200 euros per month for the mortgage, so not a trivial amount for a family. It is a worst case scenario for a rent.

NOTE: I have written a couple of Excel spreadsheet, available on Google Documents Cloud, to perform the computation of a linear or French morgage which highlights the down payment, the government reimbursement on the intereset paid, etc. outputting the final monthly payment.
You can leave a comment if you would like to get these sheets.

So, is it convenient to buy a house now?

If I buy a 300000 house now, in 2016, with a 2.1% interest rate, I would pay in interests  113000 euros.
Had I bought a 320000 house in 2015 with a 3.1% interest rate, I would have paid in interests  163000 euros.

So, the price of the house in 1 year has increased by 20k, but the overall interest repaiment would have been 50000 more!

How much is one year of rent? 1200 euros per month times 12 months equals 14400 €.

So, in total, one year worth of waiting let me save 50000 - (14400 + 20000) =  15600, that is roughly another year of rent. And, under rent, I have not to take care of the maintenance of the house and the government taxes on the property.

NOTE: I considered a linear mortgage. A normal mortgage would have been even better for the rent!

So, in a deflationary period like nowadays, it is important to understand that not always buying a house is a good investment. Unless you have particular personal reasons to buy a real estate asset.
For our parents, and grandparents, it was completely different: you did not have to ask yourself, it was important to buy as soon as there was the chance to do that!
We are living in complex times.

Next time we will talk about the goverment tax breakes if you decide to purchase a house.

Pareto and inequality

Are you familiar with the Pareto's principle?

In a nut shell, Vilfredo Pareto, an Italian scientist that lived in the nineteen century, made the observation that in Nature and in many human activities there is this bizarre aspect: roughly 80% of the effects come from 20% of the causes

For example, in 1896 he discovered that 20% of the people had 80% of the land.

Now, they say that the world has never been as unequal as it is today: rich are becoming richer, poor are becoming poorer.

Is it true? well, according to recent news and wealth indicators it seems it is. It is bad news, indeed.

There are many reasons for this, but let's move on with Pareto's principle, ie 80% is in the hand of 20%'s only.

What happens if we apply again Pareto to the 20% of the richest population?

Well, it turns out that 4% of the population has control over two third of the wealth.

Let's apply Pareto again.

We discover that 1% of the population has control over 50% of the wealth. 

Like in 1896 in the agrarian Italy!

Are we all condemned to this empirical principle that looks like more as a prophecy?

I think that we can all agree on one point: progress is not only the capability of using your smarthone to whatsup a guy living on the other side of the world. Progress is the possibility of living in a world where there are no huge differences in how wealth is distributed, unless you want to live in a district with armed walls, barble wire, CCTV, police everywhere because you are scared to leave your house and to be kidnapped or killed.

Rock for all seasons - 1

I love rock.
There can be tunes that are good to make your 3-months-old baby sleep peacefully, or to motivate yourself when you are in the gym, or to help you focus on what you are doing.

I always try to seek for new songs, but as time passes by, it is always more difficult since there are not so many good songs realeased each year (or I have not time enough to keep me updated).

So, a couple of soft songs for helping your baby to sleep:

And some others to help you focus on what you are doing (maybe at work):

The last one has a wonderful video. It makes you love the actress, Maya Deren.

Friday, June 24, 2016

First brick out of the Wall

Today I had planned to write the second part of Home Sweet Home - The mortgage, but something more important has happened last night.

Guess what?

Now, you could be in favour or against this decision, but in my opinion there are two important considerations worth to be done:

1. First, British people have given Bruxelles, and us all, an important lesson of what democracy means. 
2. Polls did not predict the outome, and the market did not price in the event.

The first consideration is by far the most important from a historical, political and sociological standpoint: Bruxelles do not love democracy, they fill their mouth with words like "brotherhood (ours), populism (theirs), progress (ours), archaic ideas (theirs) and so on.

Bruxelles give the impression that democracy from them is an obstacle, not the pillar of modern Europe: they would like to have a non-elected elite that lead European peoples like an auto-pilot, remotely programmed, is supposed to drive a plane full of people who need to reach different places, that have different tastes and different languages;despite this, the passengers are oblidged to get on the same plane and being served the same food, with a menu written in a language they do not fully understand.

The second consideration is interesting: polling agencies have made huge mistakes in their  results. From 52% pro remain to 48% pro remain is a huge, incredible error, in demoscopic statistics. Since I cannot believe they have become stupid and incompetent all at once and only in recent years, I start thinking that some polls have been rigged: for example, if your customer "pushes" to stay in the EU, one thing you can do is publish polls that state that there is a large majority voting to leave the EU: this triggers the fear of those people who want to stay in the EU and pushes them to go to the nearest polling station. So, either they are not professional, or they are dishonest. I cannot find any other explanation. Whatever the reason is, for the future, the polling agencies are not reliable.

In any case, should I be interviewed about what my prerences are, I would lie: it is more funny, and it serves democracy better.

I would like to spend some final words about the so called "populists"; well, in Italy the press sheds a very bad light on the euroskepics. TV news and newspapers depict these guys as "ignorant, dishonest, that take advantage of people's ignorance"; therefore they are racists, demagogos etc.

This is simply untrue.

I invite you to watch two interviews. One is with Bernard Connelly, the other with Nigel Farage. Two different characters, two different lives, yet they both love democracy and are, in my opinion, British patriots of the free thought.

After you have had at least a glance to these interviews, do you still share Italian press opinion of the British euroskeptics or populists?

Until next time.

PS: it would be interesting to talk about the recent rise of gold and plunge of sterling, but there are many other blogs covering these topics. 

Monday, June 20, 2016

Home Sweet Home - Our parents

My parents, and the parents of my parents, believed in the power of the dark side of the brick.
No matter what, they were sure that buying a house was by far the best investment you could do.
How things have changed since then!

Until recent years, the problem was called inflation.
Inflation has several meanings, but, for the sake of simplicity, for our purposes it means that with 1 euro in your pocket today you can buy more things today than with the same euro tomorrow.

"So what?" you may argue.
Well, the generation of my parents grew up (and thrived) in a world full of inflation. So, when they asked for a fixed rate mortgage, they knew that
1. their house would appreciate year after year
2. their mortgage would be less and less heavy on their income.

Let's make an example.

In 1990, you wanted to buy a house.
Let's assume that the cost of the house was 50000 British pounds (in 1990, according to the graph depicted in Figure 1, this was the typical cost of a house in UK)

Figure 1
You had to ask for a mortgage. At that time, a fixed intereste mortgage, ie a mortgage whose montly payment would be the same thorought the duration of the loan, was around 14% (oh my God! you would say, today it's less than 3%).

Let's suppose that the duration was 20 years.

So, the first monthly payment turns out to be roughly 621 British pounds.

How much was the average salary in UK in 1990? It turns out it was around 17600 Pounds per year, ie 1446 pounds per month.

So, on average, the weight of the mortgage in 1990 was around 43% of your wage.

Let's see if we can be confident about our maths (see Figure 2 below)

Figure 2

Well, it seems that in 1990 the mortgage payment was somewhere between 45% and 50% of one's salary. So we are not so far away from the results that others have published.

  • Note: our approach is not very rigorous, but here we are interested in explaining the principle, we are not interested in the accurate figures.

Now, you start paying your monthly fee....and, magic!

Fig.1 shows that your house has started appreciating. So your house was a real asset, in that period. After ten years from the original 50000 pounds it raised to almost 75000 pounds (+50% in value).

It is not only that. What happened to your average wage?

In 1990 it was, as we have seen, 17600 pounds per year.
In 2000 it had raised up to 27700 pounds per year. Remember that the monthly payment is always the same, and now it is only 621/(27700/12)= 27%

In a nut shell, in ten years:

  1. the value of the house increased by 50%. Great.
  2. the percentage of the mortgage payment over a British citizen decreased from 43% down to 27%. Wonderful!
Yes, at that time the house was a real asset in UK.

Is there a catch? yes, there is a catch. There are no free lunches and there are always winners and losers.

Until next time.

Sunday, June 19, 2016

Home Sweet Home - Assets and Liabilities

Empty homes in Detroit (Michigan, USA)

What is an asset?

Broadly speaking, an asset is something that is valuable: that is something for which somebody is paying you money or would be willing to give you money to use it or to purchase it.

An example to make things clearer.

If you have a house given for rent, then this house is an asset: the tennant is paying you a rent. Thanks to his monthly payments, you can reimburse the mortgage you are paying on the house, the government taxes on the house, the local taxes, the condominium extraordinary expenses, the extraordinary maintenance expenses. Plus you may have extra bucks left in your pocket. On that amount, you have to pay an income tax. All these expenses are called liabilities.

The house is also an asset because, if you decide to sell it, somebody would pay you something.

Now, let's suppose you cannot find anybody to rent the house to. All the previous taxes rely entirely on you. The house is no longer an asset. It has become only a liability, something that sucks out the money from your bank account.

Well, you may decide to sell the house to get rid of it. Maybe it is a hard decision, you inherited the house from your parents. Of course, you have to find somebody interested in the purchase.
If there is nobody, you have to drop the price. Down to a point where the residual mortgage cannot be even backed up by the amount of money you get from the buyer: you sell the house, but you still owe money to the bank. This is something that happened in the USA and the Netherlands in 2008-2009. USA are in America, the Netherlands are in Europe. Very far away, different currencies, different cultures, different languages, still the same fate due to common causes.

So, an asset is something that gives you money.
A liability is something that sucks your money away.

A house can be either an asset, or a liability. It depends on several factors, but the key point is simple: you have to find somedoby willing to pay you a rent or to purchase it.

This seems trivial. Straightforward. Nevertheless, many people do not think about this when they go to a bank and ask for a mortgage.

First rule in ExitEconomics: the value of something you own is not what you think it is, it is the value that the rest of the world is willing to pay for it now.

This applies to real estate, to cars, to the training courses you attend to improve your skills to seek for a job, to EVERYTHING.

When I decide to invest my time and resources on something important on a long run, I have learned to always ask myself this question: how much does the rest of the world (that is excluding myself) value what I am about to do? In other terms, I am willing to spend NOW money, that is to accept a liability, for an investment that will turn to be a long term asset in the future. If the asset is not good for the rest of the world, it will not cover the liabilites that I have made.

Post scriptum: be aware that for the government the house is always an asset on which you have to pay taxes, even if you are losing money on it. So, they claim it is an asset for you, but the reality is ...well, the reality is that the house is always an asset for the government since they can tax whatever they want on a real estate property, especially when they are short of money.
A very recent example:  Italian Prime Minister, Mr. Monti, increased property taxes by a whopping 143.5% in Italy from 2011 to 2014. Those unlucky italians who believed that the brick is sacred, that is resilient to crisis and political changes, had to reject this belief almost overnight!

Why this blog?


my name is Lorenzo.
I was born in Rome, Italy, and now I live in the Netherlands, close to Amsterdam.

I made up my mind to leave Italy in 2014.


Because in 2012 I started studying economics in an attempt to understand the undermining roots of the crisis that we were experiencing in Italy. I am an engineer,  and I had no clear idea about the differences between a stock and a bond, the pros and the cons of a common currency, the relation between interest rates and the cost of money borrowing, etc.

Tabula rasa. Zero! I knew how to design, test, schedule in the engineering domain etc. but for a simple mortgage I had to ask a bank advisor and rely on him entirely.(*)

I had only one question in my mind: I have a degree, I work in a big company, so why am I always struggling to get to the end of the month, my wife -architect- has trouble in finding a job while my parents, undergraduated, had had no problems like mine? Why are we experiencing such a bad situation in Italy?

I started studying whatever I could in my free time: blogs, books, on-line videos, economy sections in the newspapers.

Little by little, step by step, I started discovering what I believe are the deep reasons for the crisis in Italy, and in the Eurozone as a whole. And, why not?, what to expect from China's trade balance for my renting fee!

So, in 2014, I decided to move away from Italy. I had a permanent job, a house without a mortgage, a 4 year-old son. Many told me I was crazy.

My situation has largely improved since then and I go on studying and applying what I am learning. It is a never ending process.
I changed my job. The change of my job was also based on some economics considerations.

My blog is aimed at sharing with you my experience. In particular, I will try to apply my studies in economics and finance in our everyday life. Both macroeconomics and microeconomics, gold, criptocurrencies, real estate, job, engineering, technology, accounting, etc.

Just an example: is it better to buy a house or to go for a rent nowadays? Is it a good time to buy a car? What are the best investments you can do to protect your savings today? Is it more important to look for a bit higher wage or to change dramatically your area of expertise? If you are an employee, what are the key figures in the balance of your company that tell you whether your company is healthy or on the edge of bankrupcy?

I am not an English native speaker: so I hope you will not be too severe with me if I sometimes make a grammar mistake :-)

(*) This situation is very common: you can be a scientist, a teacher, a professor, whatever!, but when it comes to finance, your brain shows up a sign stating "closed indefinitely". Disappointing, isn't it?