King Dollar

Imagine you want to buy 100 thousand barrel of oil. The oil is coming from Saudi Arabia. Are you paying Saudi Arabia in riyal? In other terms, are you going to go to your central bank, convert your euros to riyal, and with those ryial you buy the oil? This would seem to easiest thing to do.
No, you are paying Saudi Arabia in dollars.

Oil is traded in dollars worldwide since the early 70's. That's why we talk about petrodollars.

Ok, now you live in the Netherlands decide to buy a large amount of, let's say, TV screens from Japan. Are you going to pay them in euros? Yes, you can. They would accept euro in exchange for TV screens.
What does it happen if you live in Argentina and want to buy the same Japanese TV screens? well, unless you have yens, that is you convert your pesos in yen and buy Japanese goods, you cannot do that. You have to convert pesos in dollars, and with those dollars you buy the Japanese goods.

In other terms, from these two examples, you can already see that the dollar is used as a currency medium for trade exchange between two different countries.

The International Monetary Fund (IMF) considers a basket of five currency, to be used as reserves for international trade.
They are:

• US dollar (41%)
• Euro (31%)
• Chinese Yuan (11%)
• Japanese Yen  (8%)
• Pound Sterling (8%)

The percentages in brackets refer to the composition of each currency as its weight to the IMF Special Drawing Rights (SDR), a kind of currency that is issued by the IMF. This "currency" can only be used and exchanged by Central Banks. So, it is not a real currency (you do not buy bread at the grocery store and pay with SDR). A pie chart is even better to show how the situation has evolved in the recent years.

(in light yellow the new entry: the Chinese Renmimbi)

As you can see, the dollar is by far the biggest weight in the IMF's basket. Recently (2015), Chinese Yuan was added in the basket at the expense of the Euro (mainly), the Yen and the Sterling. The dollar weight was unchanged.

So, let's recap: when two firms in two different countries decide to trade, they typically exchange goods or services paying in dollars.

Three important questions:
1. Why do they need to use a foreign currency?
2. Why is the dollar the most used foreign currency?
3. What are the consequences for the USA and all the other countries?

First question: Why is there the need to use a foreign currency if two countries decide to trade between themselves?
Answer: let's use an example. If I am Polish and I need to buy a Toyota, theoretically I could pay the Japanese firm in zloty. The Japanese could convert my zloty and get their yens. But if Japanese do not want any zloty, we should go for a barter. The Jap could buy some stuff from Poland in exchange for the Toyota car. Of course this is impractical. That's why they both decide to use a currency that everybody wants.
Of course nobody prevents Japan from accepting Polish zloty. If Japan has zloty as a currency reserve, they can accept a payment in zloty. But this would imply that that the Japanese Central Bank should hold reserves for all the currencies in the world, which is inconvinient. It is easier to have just a bunch of currencies to be used as reserve, possibly from the biggest economic areas in the planet.


Second question: ok, for international settlements of payments, we need a common currency which we all agree upon. But why the dollar and not, let's say, the argentinian peso or the canadian dollar?
The easy answer is: the USA are the biggest economy in the world, so everybody does business with them, and needs their currency.
The other answer is more complex: the USA won the Second World War, and, according to the Bretton Woods agreement in 1944, the dollar became de facto the global reserve currency, mainly replacing the Pound Sterling. Following the collapse of the gold standard in the period between 1969 and 1973, the USA created the petrodollar, making deals with Saudi Arabia and other OPEC countries: you want oil? pay in dollars. Who prints dollars? the USA. So, since everybody needs oil, everybody needs dollars. This has been keeping the demand for dollars high.

Third question: so, everybody needs to use dollars. What are the consequences for the USA and for the other countries?
The consequences, even if they are not known by the people, are huge: I am not exaggerating, the consequences are so important that they have shaped the world we know today. Since the abandonment of the gold standard, and with the raise of petrodollars, the US has been having an increasing trade deficits. They got goods and services from developing countries, and paid with money paper, ie dollars, in exchange for that. This has created:
1. raise in the economies of the Asian countries (Japan, Malaysia, Vietnam and nowadays China)
2. huge bubbles in the stock market
3. lowering interest rates in the cost of money for the US government, because the exporting countries, with all those dollars in excess, have reinvested the dollars in US treasuries: since the demand was high, the yield was lower and lower. So the US government could refinance with little expense, so increasing expenses on social welfare.
4. loss of jobs in industry in the US, because industry could pay a few euros a chinese worker instead of paying hundreds euros per day a worker in Michigan.
5. stagnating wages for middle class, since industry was disappearing and there were too many workers to be absorbed by industry and all the service companies working around industry.
6. surge of private debt (household debt) because, in order to keep the same quality of life, and thanks to low interest rates (point 3) families found it easy to increase their level of debt.

and many other things. In a nut shell, a huge acceleration of production worldwide, speed-up of globalization and huge increase of consumption (due to the low interest rates on loans), and net decrease in the savings rate (because you do not earn enough). All of this has led to a shrinking middle class in the US.

Bear in mind that everybody is accepting dollars in exchange for goods and services because they think that the dollar is stable and trustworthy. Now, you may say it is not true: due to inflation the dollar is losing purchasing power, the Fed has been printing trillions of dollars in the last 8 years and China is growing and piling up gold. Nevertheless, when I hear this objection, I raise an eyebrow and start to ask: what is the alternative? As far as I can see, in economics, there is not good or bad, there are better or worse solutions. Everything is relative, not absolute.
The euro zone is a disaster, China is an unknown (following the same steps of Japan in the 80's), Japan has been in stagnation for twenty years and the UK lives mainly with the finance industry.
And the same monetary policies that the Fed has been running through, are the same that other central banks are using! so, there is no clear winner. If dollar loses purchasing power, and governments may become wary of the US currency, what currency should they keep in their (electronic) vaults? everybody is trying to weaken their currency!
In such a bad scenario, it makes no surprise that currently the dollar is stronger with respect to all other currencies.

Lies, damned lies and statistics: median income or average income?

Keep calm and don't panic.

I want to talk about this

and NOT about this (even if it should be more appropriate, for an academic but I am not an academic :-)


Would you prefer having a household (ie family, for those people who are not native English speakers) income of 29000 € or 20000 €?

They seem close, but 29000 is almost 50% higher than 20000. A raise by 50% in salary would be amazing, wouldn't it? :-)

The aforementioned figures are:

Average household disposable income in Italy: 29000 USD
Median household disposable income in Italy: 20000 USD

NOTE: USD stands for United States dollars. Typically these figures are given in a currency that is widely used in the world to let economists make comparison among different countries, without being bored with currency rate conversions. The US dollar is by far the most used currency in the world.

Typically the average income is reported by Italian, French and Dutch press: it is simple to understand, you take a bunch of people, sum up their incomes, and divide the result by the population. Easy.

But misleading.

In fact, if there are 99 guys earning 20'000, and 1 guy earning 200'000 (that is ten times more than the majority) per year, the average is

(200000 + 99*20000)/100=21800

So, you can see that the average is hiding a huge difference of income in the population. Most of the people are earning 20000, not 21800, which is almost 10% more!
Let's make another example, and suppose that there are ninety people earning 20000, 9 earning  200000 (ie ten times more than the majority) and a lucky guy earning 2000000 (2 million, 100 times more than the majority). Total population is still 100 people.
The average income becomes

(2million + 9*2hundred thousand+90*20 thousand)/100 = 56000

That is, according to statistics, the average salary is 56 thousand, that is 1800 % more than the majority.

Now you start to grasp the surface: in a society where there is an important different among the incomes of the population, talking about the average is meaningless.

NOTE: if this has triggered your curiosity, then have a glance at a very simple yet teasing post that I wrote on the Pareto's principle applied nowadays.

There might be an increase of wealth (see GDP, the ubiquitous Gross Domestic Product), yet this improvement goes only to the richest. The average GDP per capita, that is GDP divided by the population, can't see this. Maybe the majority got poorer but according to statistics on average we are all richer.

Is there a better metric to be used? First of all you have to understand that journalists (and policymakers) typically have a humanistic background, ie they cannot sum up 2 plus 2, they simplify complex things to the extreme, and in Italy they are even proud of being ignorant in mathematics.
And mathematicians, physicists and engineers are proud to claim themselves ignorant in economics. They are scientists, and do not want to be bored with this stuff like stocks, GDP, interest rates, that pertain to human creation and not to the laws of Mother Nature.
So, it is difficult to get from mainstream media this information. You have to use internet.

In any case, the good news is that a better metric does exist, and is called median.

You simply sort the incomes from the lowest to the highest, and pick up the value in the middle, which is called the median of the population.
So, in our first example (99 guys earning 20K, and one guy earning 200K), the median is 20K, because you put in a row all the people according to the salary, but it turns out that the fiftieth guy still earns 20K. So the median is 20K.

In the second example (90 guys earning 20K, 9 guys earning 200K, 1 guy earning 1M), the median is still 20K.

I remind you that for the newspapers, reporting the average, the income would have been 56K, while a vast majority (80% of the people) only get 20K per year!

This is a first dip into the magician sea of statistics, ie how I can screw you over whenever I need to.

So, I am going to give you an advice: if you want to see how a country has been performing since 1971 (when Bretton Woods system collapsed and inequality started increasing) look especially at median per capita figures. You are not interested in the overall wealth of a country, you are interested first in the wealth per family (is it increasing?) , and especially if the difference between average salary and median salary is increasing over time: this means that the middle class is shrinking.

Poland

My work is going to increase in the following months so my posts will be more sparse in the upcoming weeks. It is a pity, I have lots of ideas running through my mind, but it requires time to write them down. Each time I write a post, I need to get information here and there, save pictures, organize thoughts and that requires time. And time is the most important resource for us all, because it tends to be more and more scarce, especially when you have a family.

So, today I am going to write about a Country I have recently visited: Poland.

I have been close to the Czech border of Poland: what struck my attention was that the roads, the squares were all tidy and clean. The woods, the lakes and the forests were wonderful.
Yet, many of the buildings were in a very poor state: the country is not rich, and this is reflected by the purchasing power of the local currency, the zloty. Living in Poland is extremely cheap for an European citizen.

At present, with one euro you buy 4.25 zloty.

But, if you try to withdraw zloty from an ATM in Poland, the currency they give you is one euro = 3.95 zloty! that is 7% less. Damn banks!



The main town in the region I visited is Wrocław, the fourth-largest city in Poland: in 2016, the city is  European Capital of Culture and World Book Capital.
The city is really worth to be visited, especially the wonderful Market Square: it is full of life, with children playing all around making soap bubbles, street artists everywhere and nice bars and restaurants overlooking the square, which is a pedestrian zone. No cars around.

There is a very well done site that lets you compare the cost of living between several towns in different countries. The site is Numbeo.

Keep in mind that the average Polish meal is far far better and more abundant  than the average Dutch meal (this is said by an Italian, and I am always complaining about the food outside Italy, not to mention the coffee!).
So, let's make a comparison between the cost of living in The Hague (Netherlands, close to where I live) and Wroclaw.

Indices Difference
Consumer Prices in Wroclaw are 47.35% lower than in Den Haag
Consumer Prices Including Rent in Wroclaw are 46.61% lower than in Den Haag
Rent Prices in Wroclaw are 44.54% lower than in Den Haag
Restaurant Prices in Wroclaw are 58.02% lower than in Den Haag
Groceries Prices in Wroclaw are 47.38% lower than in Den Haag
Local Purchasing Power in Wroclaw is 44.69% lower than in Den Haag

I know numbers are impersonal, but what you see here is interesting. Everything is cheaper, roughly 50% cheaper, nevertheless a Polish family father is 45% poorer than a Dutch family father, even if he lives in an European country so cheap like Poland.

The point is simple: the cost of living is a ratio between what you buy and what you earn. So, yes, things are inexpensive, but the salary must be far less that the Dutch salary.

It turns out that, after tax, a folk in Poland gets, on average, 730 € per month, less than one third of a Dutch's, which is 2472 €.

So, we can conclude that Wroclaw is cheap for a Dutch, and is expensive for a Polish.

I can't even imagine what would happen if Poland becomes part of the euro-zone. I think they would simply become a colony of Germany, given the current Polish economy, which is far too weak than the German one. House prices would skyrocket and people would fall into deep debt. Speaking with people in Poland (bartenders, hotel managers) it seems they understand that joining the euro-zone would be a bad deal for them.

In a future post, we will look inside the Polish macroeconomic data and demography.

But, before that, I leave you with a nice picture (it is not meant for vegetarians, sorry).

This hamburger "monstre" with fries and all sort of things horrible for your health but nice for your belly costed just a few euros.
So, yes in Numbeo.com your read that

                                                          Den Haag         Wroclaw     Difference

Restaurants
Meal, Inexpensive Restaurant	15.00 € (64.64 zł)	4.64 € (20.00 zł)	-69.06 %

but it does not mean that you get the same quality and amount :-)

I told you that numbers are impersonal. Useful, but impersonal.

Money series: is the money that you put in a bank still yours?

This post is part of the "money series".

First of all a question: do you think that if you deposit, say, 1000 € at your local bank, or in an online bank, that money is still yours?

Well, sorry to disappoint you, but the money that you put in your bank account is not yours any longer: in fact, it belongs to the bank. Legally.
The bank can decided whatever it wants to do with that money.
The bank has only a liability towards you, in that it is obliged by the law to give you the money back if you ask for it.
We have already talked about what liabilities and assets are on a very general basis in a previous post: that post was meant to let you conceptualize what an asset is and what a liability is. Assets and liabilities are accounting jargon, but if you understand their inner meaning, you will be far better off than most of your friends, colleagues and relatives.

When you deposit 1000 € in your bank, the bank takes legal ownership of the money, and it simply record in a ledger that it owns you 1000 €.

Why is it a liability? well, a liability is something that sucks the money away. In this case, the bank is supposed to pay you an annual interest on the money deposited. So, for example, if the bank grants you 1% of interest on the money you deposited, it means that after one year the money in your bank account has become 1000 € + 1%, that is 1010 €.

So, the money you deposited is a liability for the bank because the bank has to pay you an interest over the sum that you have deposited.

NOTE: today this is no longer the case with many banks. They do not even give you an interest on the money you deposited. 

Why does the bank pay you an interest? if it is like that, it seems  unprofitable for a bank to give extra money "for free".

The interest the bank pays you is the main reason why you do not keep cash under the mattress. The cash does not bring any interest.

NOTE: this is theoretical. We will see in the future that to keep cash may be better than keeping it in the bank account under particular conditions.

The bank pays you an interest because:

1. the bank takes your money and, even if it pays you 1% of interest, it may well invest your money in more profitable projects. So, to do that, it has to pull you in with a yield that is more than zero.
2. the bank carries on a risk, in that it may not refund your money if it goes bankrupt. This is not known and understood by the people, but when you lend your money to somebody (in this case a bank) there is ALWAYS the risk that you do not see your money back again, no matter what they can say.

So, we have cleared up that when you put your money in a bank, that money is not yours any longer; it belongs to the bank. The bank grants you the right to withdraw that money sometime in the future, for example by an ATM, or by going to the clerk at the desk and ask for the money back.

Ok, we understand that if we put 1000 € in a bank, that money belongs to the bank: but who created the 1000 €?

Before answering to this question, which is very complex to give an answer to, let's clear up a point:
when you deposit 1000 €, you mean banknotes, cheques or a bank transfer?

Of course it may be both. You can step into a bank and deposit 1000 € cash, get a receipt and check your online bank account. The same if you deposit a cheque.
If you make a money transfer from one bank (say bank A) to another (bank B) , the procedure is the same.
The only difference, which is invisible to you, is that in this case there is not even a transfer of a physical quantity (banknotes or the paper of the cheque) from you to the bank, but a simple transfer of information from bank A to bank B, in the forms of 1's ans 0's.
So, money is currently only a set of long strings of ones and zeroes that get transferred from one bank account to another.
Do you know how 1000 € looks like in digital format, as stored in a bank's registry? They look like this: 0000001111101000.

So, when you deposit a cheque, or cash, or make a bank transfer from your bank to another, the account in the receiving bank account is increased by 0000001111101000, that is 1000 €.

So, an interesting point: do you think that in case of hyperinflation we will see images like this, where you can see on the left a gentleman sweeping away with a broom valueless banknotes during the German crisis in the '20s?

No, we won't. Because now money is digital.

This is just to show you that, whoever creates money today, he does that by typing numbers on the keyboard of a laptop.

Until next time.

Online learning - Coursera

We are experiencing a revolution in the teaching system, which is going to have deep impact in the educational welfare.

When I was a student, you had to pay hundreds or thousands of euros in books and courses to get an education and very often you had to go to the university which was the closest one to your hometown, unless your family could afford to send you to another place and pay for the rent, the fees, the food etc.

Now, if you want, you can get a decent, yet basic, education by spending a few dozens euros thanks to learning-on-line platform, wherever you are and according to your daily or weekly schedule.

You can learn mostly for free: if you want a certificate, you pay for it.

For example, let's have a look at Coursera.
At this link are some of the universities and large companies whose courses are available online, which include:

• University of Washington
• University of Sydney
• IBM
• Copenhagen Business School
• Ecole normale superieure
• Stansford
• John Hopkins University

So we are not talking about god forgotten universities in the middle of nowhere with flex teachers taken from the unemployment lists.

I wanted to sign up for a course in Macroeconomics, so I typed "macroeconomics" in the search bar of the home page, and this is a screenshot of the current available curses.

The list is updated every once in a while because some courses are deleted when they are over and replaced by others.

So, let's pick up "the power of economics: economic principles in the real world" from the list. Sounds nice.

The course is taken by Dr. Peter Navarro, from the Paul Merge School of Business. There are 13 hours of videos and quizzes, the language is English, with many subtitles available.
Then, a very important thing in this Web 2.0 world. The User Ratings.

I think that the user ratings is by far the most important information you may get through social media. If people are happy or unhappy about the product (good or service) that they buy, they express their reasons or concerns and, long before you buy the product, you get an opinion by yourself. You can average the results: the more the opinions are, the better is the idea that you get.

When I was a student in the engineering branch at La Sapienza in Rome, you were assigned the courses in a particular discipline (for example numerical methods) according to your initials. There were many students and they had to be split up between several teachers, so if your last name started with "B" you went for the coursed of prof. X, if your last name started with "S", at the far end of the alphabet, you went with prof. Y.
Of course, if Y was an incompetent or a far less brilliant teacher than X, there was little or nothing you could do to change that. How ridiculous!

NOTE: if you think this is also a good way to multiply the jobs of professors in Italian universities, you may not be too far away from the truth.

Let's move back to Coursera and the lessons in macroeconomics:  I watched the first hour of lessons, a mere introduction to the discipline, by Dr. Navarro: he uses a friendly way of explaining macroeconomics by means of examples taken from recent history, and I think I will end up buying the certificate.

How much for the certificate?
Answer: 44 euros.
The price of a dinner in a restaurant, or two monthly payments at the local gym!

You can see with this example a case of deflation induced by new technologies: the same teacher can reach thousands of pupils, instead of a few dozens. So, on the long run, there is less need of teachers. As a consequence, giving the same amount of available teachers, they are paid less. This is an example of deflation caused by oversupply (of teachers).

Now, let's move to the other side of the coin: the demand.
The demand is given by people who want (or need to) learn macroeconomics. Of course, thanks to the fact that

• the teaching can be done off-line, so whenever it best suits you;
• you can stop and resume whenever you want.
• you can reload and rewatch past lessons.
• you don't need to be in a classroom
• it costs only 44 euros

this can potentially give a boost to the number of people approaching the discipline of macroeconomics (or fluidodynamics, or genetic engineering, etc).
Since you do not need more teachers, (Dr. Navarro is always the same folk) the cost will go down, and, thanks to the user feedback, the quality is going to improve.

Is it everything nice and flawless? of course it is not, there are drawbacks and pitfalls in everything, also with the shiniest coin.
First, you are not in a classroom, so there is no interaction with the teacher or with other classmates (no friendship, no deepening of the topics). Secondly, unless it is part of a larger course in economic disciplines, the certificate you get is not "expendable" in the labor market.
Thirdy, each lesson is very short, just a few minutes. Extremely helpful if you need to split the time in studying into many frames, but it leads to excessive fragmentation of the topic. Maybe I am too severe here, but I studied philosophy and for me it is essential to have a continuous flow of concentration to get the maximum out of a topic without close a window, go back to previous web page, open the next session and so on.
Finally, you need to understand English. But to me this is not an issue, since I think that if you do not understand (I do not expect you speak English properly) a minimum of the English language, you are completely cut out from high-profitable labor market.

So, I think that online learning is extremely powerful if you already have a specialization and want to learn something extra, or if you want to have a different approach to the topics you are already studying at the college, or if you need to grasp better concepts and gain extra skills for your business and for your job.
It cannot replace formal education at the college or at the university.


The funny thing is....formal education at university is becoming more and more expensive (raising fees, decreasing tax-breaks), and on-line learning is becoming cheaper and cheaper. I already covered the cost that a student has to undertake in a previous post.

A final note on this course in macroeconomics: not in the introduction, nor in the titles of the modules, is mentioned the breakup of the Bretton Woods system in 1971. To me this is an extremely severe deficit in a course in macroeconomics, but I think that the issue here is the way macroeconomics is taught worldwide.
I do believe that the main cause for the raising in inequality in the Western countries was the abandonment of the gold standard, and more and more studies are backing this conclusion. So, a course in macroeconomics that does not cover this, is incomplete, as a minimum. I wrote about the consequences of leaving the gold standard here and here.

Why the Euro may survive longer than you think

I am writing something that I could not believe would be possible just one year ago.
I already mentioned in other posts, like this one, the reasons why the euro is a complete, total, irredeemable disaster. In a nut shell, in a fiat money system, where trade balance can stay unbalanced for decades (see my post about the origins of inequality), the only way for the system to have a bare minimum of equilibrium, on the long run, is to let the exchange rate of currencies free to self-adjust.

Simplifying to the extreme, those countries that export a lot:

1. have their currency becoming more expensive, because everybody is asking for their currency, so their products become more expensive, and they start to export less.

2. Plus, since they are exporting a lot, their factories are working at full capacity, wages increase, goods and services become more expensive. In other terms, they have inflation caused by a surge in demand, since citizens have more money to spend.

This is all ideal of course. Things in 2016 are more complicated than that. In fact, corporations today do not reflect "a country". FCA Chrysler, they produce in Serbia, sell in Italy, pay taxes in the Netherlands, are listed on the New York Stock exchange and Borsa Italiana in Milan, while having their Headquarters in London.
Plus, a French company may sell satellites (high level technology), but the tests are run in Russia, the electrical components come from China or Taiwan, the processors are bought from America, memories from South Corea, the honeycomb panels from Germany, the solar panels from the Netherlands, etc. Money is coming from China, thanks to the exported goods paid in dollars by the USA.

We are, in other terms, in a dense, interconnected network.

In addition to that, an emerging country can create money out of thin air, like China, and keep a competitive advantage in export over other countries.

Thiese are the effects of globalization. Factories can pay workers a few dollars per day in China and not 100 euros per day in Italy. This is possible in a fiat money system. Globalization was meant differently, in a gold standard.

That said, in any case I consider the sovereign currency a fundamental tool for a government of a country. The European policymakers, for reasons that are beyond the scope of this post, decided to join the eurozone and to prevent their citizens form having at their disposal such an important defensive instrument. The damage was done. And now we are living with the consequences of that dream, which has become a nightmare for many countries, and a huge opportunity for one only in Europe.

So, if the Eurozone is a disaster, why do I think it will go on for a long time? you know, historically there is only one reason that has fostered population against their leaders. It is when you do not have money to pay for basic needs, or, to say it differently, when the basic needs are too expensive to be purchased.

It is called hyperinflation.

It was hyperinflation, as a late consequence of the absurd monetary policy of John Law (who died in 1729) that led to the French Revolution in 1789. Recently, it was the huge raise in food, caused by the FED's Quantitative Easing, that triggered the Arab Spring in 2011. The Chinese riots that reached their momentum with the protests (and the massacre) of Tienanmen Square in 1989 were triggered by hyperinflation (20% in 1989 according to the Communist Party at that time, probably much higher).
Now, in Venezuela, inflation is 150%, raising: the country is collapsing, and of course media are not interested at all, nor in Europe nor in US. And, of course, everybody knows about Weimar's hyperinflation that destroyed Germany's middle class and paved the way for the ascent of Hitler (and, be aware, at that time, luckily, there were no atomic bombs that could be used).

The above examples are only a few among the many we can do. But I am not an academic, and I am not a historian either.

In any case, what I believe is that, unless there is going to be hyperinflation and you cannot find medicines and milk and bread around, nobody will raise a finger to fight for their "freedom".

Is there any possibility we will experience hyperinflation? currently, we are experiencing deflation (according to government's statistics, but other unofficial sources claim that inflation is in the range of 5-7% in the US), that is consumer prices are decreasing. This is due to credit crunch, in that banks have decreased the amount of credit to firms and households, worldwide, with the exception of China. Central Banks, following their wrong models (or on purpose, I do not know) created billions out of thin air that have inflated assets like stocks, bonds, and have prevented real estate from collapsing.

So, is there the possibility that in a world of negative interest rates, inflation can appear and skyrocket? There are economists saying it can happen if you fill the wallet of citizens with newly printed money from the banks. These people would run and buy whatever they need. So, things would dramatically, or slowly, increase in cost. But, two things:
1. The people would buy Chinese stuff. So, this money would fly to China again. And, if Chinese currency starts to appreciate, then China can devalue as it has always done in the last 20 years.
2. Real Estate would skyrocket. Rents the same.
3. Gold and silver would skyrocket. Maybe they will be banned and seized by the government.

There won't be dollars or euros on the pavements, like in Germany in the 20's, simply because money now is digital.

In any case, it would be a collapse, because in order to fight the hyperinflation governments should back the currency with something "solid", like gold. And if that happens, we would have a situation in which the eurozone countries have different gold reserves, so how can a fixed euro work in an environment where there are different gold reserves, that were not meant to backup the currency?

No, I think that eurozone will continue to exist, until hyperinflation starts to occur. Probably it will spread from the US. And this may require some years from now. At that moment, Germany + Netherlands will depart from the eurzone, since they will have managed to have business especially with Asia (and Russia, if USA votes for Trump).
In the meantime, the governments in Europe will seize all the private savings, whatever forms they may have (bank accounts, real estate - by means of inheritance taxes and property taxes, bonds by means of negative interest rates, stocks by means of increased taxes on capital gains) to repay their debts and guarantee a minimum of social welfare to pensioners and civil servants, at the expense of young generations and workers in the private sector.

What shall I do to defend myself, while living peacefully in the meantime? I will buy a house (hard asset, at a cheap price), I will buy gold and silver, I will invest in mining companies. And I will work hard to make money and diversify my skills to exploit them wherever it may be necessary, if things go not too well. And I will stay away from banks and insurance companies.

Inflation: a fairytale and a bitter reality bath

Last time we learned that the government's statistics say that consumer price inflation (CPI) is very low, and that the increase in wages, in US as in the Netherlands or in Italy, has kept the pace with inflation.

You can believe the government or not: personally, I prefer to trust my wallet.

They say that inflation is a kind of hidden tax: I disagree with this, to me it is even worse, because when you pay taxes to an efficient government, at least you get something in return, ie services. Inflation is different: it is reallocation of wealth from those who have less to those who have more. Some wealth goes from one group of people to another. And if you lack a minimum of economic culture, it may be very bad for you.

During a boom, nobody notices  that the gap between richest and poorest increases, because everybody feels better, so there is not such a big issue. It is like a rising tide: nobody sees the rocks. But, when crisis strikes, and you start suffering, cutting expenses, holidays, books, restaurants, etc. then suddenly you realise that somebody has done much better than you. You are much closer to the rocks and at that risk of a wreck than many others.

The point to understand is that it is all about who gets fresh money first so that he can use this money to increase his wealth during the booming period, and to buy discounted assets sold by distressed people during a crisis.

So, the real question with inflation is: who gets the new money first?

Inflation is currently caused indirectly by Central Banks and directly by Commercial Banks when they create new money out of thin air. The ones that get the money first (the first group), have more purchasing power than the others (the second group), since they can buy assets that are cheap. After they have bought these assets, the remaining assets cost more, because there are less left around. So, the second group must pay more to buy the remaining assets. The first group has four advantages:
1. they have bought cheap and best assets available at the beginning
2. they can sell high the same assets afterwards, when prices have increased due to inflation.
3. If there is a crisis, thanks to the money they can get cheap, they can buy assets at a super cheap price from the distressed folks who need to sell to pay out their debts, made when prices were high.
4. when the crisis is over, and the tide rises again, their assets increase in value and they make even more money.

Since banks can create money out of this air, the people who manage and steer this money have a huge advantage and political influence over the people who have to work to pay interests on debt, who end up being trapped in a debt cage.
Crisis are heaven for those who have money and financial knowledge. That is why we are living in a permanent crisis, and we continuously need extra money created by Central Banks, since commercial banks have sharply reduced the rate of loans and mortgages, with respect to pre-crisis situation.

We can use an example to illustrate this.

This example is taken from a book written by Dominic Frisby, "Bitcoin: the future of money?".
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Imagine a tiny economy. There are 20 people in it. Of these, ten each have $1 in cash, so there is $10 in the entire economy. The other ten people each have a house – these are the only assets in the economy and are each priced at $1. People quite happily buy and sell these houses for $1 each. If more houses appear in this economy, but the amount of money stays finite, the cost of houses will fall. But let us assume for now no new houses enter the economy. One person – Mr King – is suddenly able to magically create another $10 from nowhere. He decides to go out and spend some of this new money. He buys a house for $1, which the vendor is happy to sell because, based on the knowledge the vendor has, that is the fair market price.

Except that it isn ’t because there is no longer $10 in the economy, but $20.

At $1 the vendor has sold his house too cheap – and he has received devalued money in exchange. Mr King then decides to outbid the others and offers $1.50 for another house. This vendor is delighted, sells, probably feeling rather clever, and makes off with $1.50, but even he has sold his house too cheap. Mr King, meanwhile, is developing a nice little property empire. The other vendors hear houses are now trading for $1.50 and now expect that price, which Mr King is happy to pay. In other words, house prices are gradually rising to reflect the new money in circulation. There are some big losers in this process – the people who each had $1. The purchasing power of their money is now no longer enough to buy the house they were previously able to buy. Ultimately, their purchasing power will halve because there is twice as much money in circulation. They haven ’ t acted imprudently in any way – they haven ’ t even acted – yet they are made poorer by this process of other people creating new money. What about the people owning houses? How have they done? Eventually, houses prices in this economy will rise to $2 – there are ten houses and $20 in circulation. The price of their houses should rise to reflect this extra money in circulation, so – as long as they didn ’ t sell – they come out even. They might think they are richer because their house now costs $20, but this is a delusion: it is the same house. They have just survived the inflation, nothing more. If, however, they were one of the early vendors who sold for $1 or $1.50, now they cannot afford to buy back the house they previously sold. They are ‘ priced out ’ and poorer. Meanwhile, Mr King has done extremely well. He benefits, of course, as the recipient of a load of newly created money. But he was also able to buy houses for $1 and $1.50, before they rose in price to reflect the new money in circulation, so, with his houses now valued at $2, he profits from the asset-price inflation too. Wealth, which was originally spread evenly through our tiny economy, has insidiously transferred from cash-holders and those who sold their houses early to Mr King. As a consequence of this process not only has wealth transferred, but those operating in our tiny economy no longer focus on making things. Instead they look for signs of future money creation and speculate on those signs, because there is more money to be made that way.
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Who is Mr King in today's world? the finance guys and the policymakers that the finance guys fund on a permanent basis. Because they can get money cheap and sell it high around the globe. And the more money they make, the easier it is for them to control information and rig statistics to make you believe inflation is negative and that you need even more of their money to fight falling prices.

In a world like this, labour is severely hit: it is super taxed, and the money that you make, afflicted by inflation, is worth less and less. So you have to rely heavily on debt, that is money sold high by the very same people that bought your assets at a cheap price!

And the inequality gap widens. See my post about the causes of the raising inequality in the Western Countries.

Do you consider this process democratic, that is a process helping common people in a transparent way? of course it is not: it is a complex process and people prefer to think about something different and more light on a daily basis.  By relying on the State to support their lifestyle, citizens do not realize they are giving away their freedom to the same people who are enslaving them with debt. So it is people's fault, because nowadays everybody can seek for information on internet, if they are willing to do so.

So, solutions must be individual. Because there is no way you can push policymakers to create and apply rules that go against the people who pay the policymakers during their political campaign. It is plain and simple logic. And if you try to explain how things really are, you are considered a boring guy, a fan of conspiracy theories, spreading out useless pessimism. So, keep your ideas for yourself and find the best ways to protect your well-being.

How much does it cost to own a car in the Netherlands?

In the Netherlands, to have a car is like throwing money into a bottomless pit.

I used to complain about taxes and fees for cars in Italy, but when I moved to the Netherlands, well, I discovered that Italy is Heaven with respect to the Netherlands.

Let's make a comparison and use, as a benchmark, a Ford Focus: we will pick up two models, benzine (around 100 horse-power) and diesel (around 110 horse-power), with a weight equals to 1500 Kg.

ITALY(655 euro per year)

The road tax (called "bollo"), annually, costs 230  €. The road tax is especially related to the power of the engine. It does not matter if it is diesel or petrol.

Basic insurance: in first class, roughly 400 euros per year, in Rome, with an on-line insurance company. The cost of insurance strongly depends on the place where you live and on your age. I put my case, which is very low.

Once every two years you have to pass the control of the government: it is roughly 50 euros, even if they do not find anything. So, 25 euros/year.

So, basic -bare minimum, to grant with the law- cost is, without using the car, 655 euros/ year.

NETHERLANDS (1337 - 2113 euro per year)

The road tax depends on the mass and especially on the type of fuel; it does not depend on the power of the engine.

So, for the Ford Focus Petrol: 912
For the Ford Focus Diesel: 1688

So, the diesel model is 85% more expensive than the petrol model.

Basic insurance: 400 euros per year, first class. Same of Italy.
Every year you have to pass the government control: 25 euros, so same of Italy.


So, basic -bare minimum, to grant with the law- cost is, without using the car,

1337 euro/year forthe  petrol vehicle
2113 euro/year for the diesel vehicle

So, the basic cost for a car in The Netherlands is two to three times higher than in Italy, if you simply keep your car parked on the road!



We have also to consider that in the Netherlands:
1. spare parts are more expensive
2. garages are more expensive
3. petrol is a bit more expensive, diesel is a bit less expensive than in Italy
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You start to see why Dutch people move around by bike? :-) Did you really believe it was only because bicycle riding is healthy?

How many km do you have to drive in the Netherlands to be sure that a diesel car is more convenient for you than a petrol car?

Well, if N is the number of "100 km" you have to drive, Lb is the number of liters of petrol for 100 Km (roughly 6.7) , Ld is the number of liters of diesel for 100 km (roughly 5), cb is the cost of one liter of petrol (1.43) and cd is the cost of one liter of diesel (1.1 €), it turns out that the break-even point N is:

N*Lb*cb+Eb = N*Ld*cd+Ed

where Ed is 2113 € and Eb is 1337 €.

So, the break-even point for a diesel car like the Ford Focus is 19200 km in the Netherlands. 

We have not considered the initial cost of the vehicle, nor the maintenance expenses (spare parts, oil replacement, etc)